Posted: December 19th, 2016

If J sells his interest on January 1, year 2, what happens to his suspended losses from year 1?

6. J has a one-third capital and profits interest in the General Partnership. On January 1, year 1,

General has $120,000 of general debt obligations, and J has a $50,000 tax basis (including his share

of General’s debt) in his partnership interest. During the year, General incurred a $30,000

nonrecourse debt that is not secured by real estate. Because General is a rental real estate

partnership, J is deemed to be a passive participant in General. His share of the General losses for

year 1 is $75,000. J is not involved in any other passive activities, and this is the first year he has

been allocated losses from General.

1. a) Determine how much of the General loss J will currently be able to deduct on his tax return for

year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss

limitations.

1. b) If J sells his interest on January 1, year 2, what happens to his suspended losses from year 1?
2. c) [Hint: See §706(C)(2)(A), Reg. §1.704-1(d)(1), Prop. Reg. §1.465-66(a), and Sennett v.

Commissioner 80 TC 825 (1983).]