What is meant by the term “at-risk”? What is a passive activity? How do at-risk and...

What is meant by the term “at-risk”? What is a passive activity? How do at-risk and the classification of passive activity interact to determine deductibility of losses? What are the special passive activity rules related to real estate?

Expert Solution

At risk:

At risk the phrase in itself means that a particular property is prone to danger and harm. In case of real-estate property at risk means that the property is either not completely free from encumbrance or has some other kind of risk attached to the property which prohibits the property from being a clean property.

Passive activity:

Rental real estate is treated as passive activity. In order to reduce the passive income only the rental loss can be used. Thus, passive activity is to set off the passive income by rental loss from real estate.

Deductibility of losses:

As already mentioned that deductibility of passive income is only possible with the use of rental loss from the real estate. Both at risk and passive activity interact between each other to determine the extent of losses from the passive income to determine the amount of taxable income from real estate property.

Following are the special passive activity rules:

Two kind of passive activities are equipment rental and real estate property rental.
Tax payers must not be active participants of their respective businesses.
Equipment must be leased.
Real estate must be rented with some exceptions.
Limited liability partnerships are allowed to take passive activity deductions with some exceptions.

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