Question

18. John is an individual and is a real estate professional and materially participates in Partnership A and B. John is a limited partner in two real estate partnerships. Partnership A produces a passive loss of $3,000 (allocated to John). Partnership B produces passive income of $5,000 (allocated to John). How does John treat the income/(loss) on his tax return?

A. Include $2,000 net passive income in taxable income.

B. Recognize income of $5,000 and don’t deduct losses of $3,000.

C. Recognize no income or loss.

D. Deduct $3,000 loss but don’t recognize $5,000 income.

E. None of the above.

29. Which of the following entities are never subject to federal tax on its income:

A. A tax exempt investor.

B. A state government sponsored pension plan that is an integral part of the state.

C. An individual who is a real estate professional.

D. Only A & B. E. All of the above are subject to some level of federal taxes.

Answer 1

18 Ans-

Part A .

Reason:- As John a real estate professional who materially participate in both partnership and earn passive income .losses from real estate activity as per se passive can't be offset against non passive income .but here john has passive source from both partnership hence eligible for setoff loss of $2000 from passive income of $5000. So he can recognise net income of $2000.

29 - Ans

Part E

Reason:-

In All the above option everyone subject to some level of federal tax .

A tax exempt investor generally not liable to federal taxes sometimes subject to federal taxes on their unrelated business taxable income .

A State government sponsored pension plan subject to federal taxes as taxability of retirement benefits caries from state to state .as there are some states where federal tax not levied on such pensions . But it's not like it is always not subject to federal taxes.

A real estate professional liable for federal taxes on their passive income .