Alfonso began the year with a tax basis in his partnership interest of $30,000. His share of partnership debt at the beginning and end of the year consists of $4,000 of recourse debt and $6,000 of nonrecourse debt. During the year, he was allocated $40,000 of partnership ordinary business loss. Alfonso does not materially participate in this partnership and he has $1,000 of passive income from other sources. a. How much of Alfonso’s loss limited by his tax basis? b How much of Alfonso’s loss is limited by his at-risk amount? c. How much of Alfonso’s loss is limited by the passive activity loss rules?
Question
Alfonso began the year with a tax basis in his partnership interest of 4,000 of recourse debt and 40,000 of partnership ordinary business loss. Alfonso does not materially participate in this partnership and he has $1,000 of passive income from other sources.
a. How much of Alfonso’s loss limited by his tax basis? b How much of Alfonso’s loss is limited by his at-risk amount? c. How much of Alfonso’s loss is limited by the passive activity loss rules?
Solution 1
a. Alfonso's tax basis in the partnership is 30,000.
b. Alfonso's at-risk amount includes his tax basis plus any amount of recourse debt he is personally liable for. In this case, his at-risk amount is 4,000 (recourse debt) = 34,000.
c. Since Alfonso does not materially participate in the partnership, the losses from the partnership are considered passive losses. Passive losses can only be used to offset passive income. Alfonso has 1,000.
Solution 2
a. Alfonso's tax basis in the partnership at the beginning of the year is 10,000 (6,000 nonrecourse debt). Therefore, his total tax basis at the beginning of the year is 30,000 + 40,000. Therefore, all of Alfonso's loss is limited by his tax basis.
b. Alfonso's at-risk amount includes his initial investment of 4,000. Therefore, his at-risk amount is 30,000 + 40,000, $6,000 of his loss is not covered by his at-risk amount and is therefore limited.
c. Since Alfonso does not materially participate in the partnership, the passive activity loss rules apply. These rules state that passive losses can only be deducted against passive income. Alfonso has 39,000 of his loss is limited by the passive activity loss rules (1,000 passive income).
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