Question

Discuss the treatment given to suspended passive activity losses and credits. What happens to an activity’s unused losses and credits when the activity is sold?

Answer 1

The treatment of the suspended passive activity losses are deductible from the taxpayer's current year's passive activities income to the extent of that passive income.

The case of Passive credits can only be used only for the tax which comes up on passive income of the taxpayer. The passive losses or credits can be carried over indefinitely for adjustment against the passive income or tax on such passive income, if the same is not utilised in current year.

All those activity’s unused or suspended passive losses which exists with a taxpayer who sells the passive activity, may be used to reduce the gain from all such sales or it will result into the recognized loss. So to say that all the suspended passive losses should be utilized fully in the disposal year.

On the other hand, all passive credits are allowed on such dispositions only in case there exists positive tax on passive income to consume the passive credits.

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