Losses  Can generally deduct losses from business activities conducted as sole proprietorship Restaurant Can offset other income  Losses from “investments” Such as an alpaca farm  Can these losses offset other income?

At-Risk Rules  Generally deductible losses are limited to amount invested in business, i.e., basis Calculating basis=  Amount invested  Recourse and nonrecourse loans Nonrecourse: not personally liable  + Income from business  - Losses from business  - Distributions from business

At-Risk Rules  Losses are also limited to amount at risk Amount at risk generally does not include nonrecourse loans  Rules apply to individuals And corporations with < five owners  Losses can be carried forward  Losses can not offset income from other activities

At-Risk Rules  Real estate Nonrecourse financing creates allowable losses if  Borrowed for holding the property  Borrowed from a bank  No one is personally liable for debt Note secured only by property

Passive Activity Losses  Passive activity Goal was to reduce use of tax shelters  High income taxpayers paying no taxes  Rules apply to losses generated by activity

Passive Activity Losses  Passive activity Trade or business in which taxpayer does not materially participate  Material participation: involved in activity on a regular and continuous basis 500 hours per year Do all the work Personal services (attorney, doctor, etc.) Material participation in five of last 10 years or 100 hours per year if more than anyone else’s participation

Passive Activity Losses  Passive activity Rental activities (not short term rentals – hotels)  Doesn’t matter if you materially participate  However, can deduct up to a $25,000 loss MFJ if “actively” participate in real estate Active: approve tenants, decide rental terms, approve repairs and improvements  Must also have at least 10% ownership $25,000 allowance is phased out if AGI is above $100,000 for MFJ  Can’t take $1 of loss for every $2 AGI > $100,000  Also, real estate professionals (more than 750 hours per year) can avoid passive activity loss rules if materially participate

Limits on passive activity losses  Losses can only be used to offset passive activity income Can’t offset active or portfolio income  Losses can be carried forward but retain their character  Losses not previously allowed from a passive activity are allowed in year passive activity is sold Grouping of passive activities  Must group in first year; more group, harder to dispose of entire interest