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ACCT553

Week 3 Homework Solution


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Chapter 7
1. In your own words, please describe what a "suspended loss" is, how it is
generated, and when it becomes deductible. (5 pts)
Suspended losses are created when losses from passive activities exceed income
from passive activities in a tax year. Those excess losses are suspended (i.e.,
disallowed and carried forward to a future date).
Those losses can be deducted against future income from passive activities, and
can be deducted in their entirety when the activity that created the suspended loss
is disposed of in a fully taxable disposition.
(7215)
2. Please describe "active participation" as it relates to a taxpayer's involvement in
an investment in real estate. (5 pts)
Active participation, as opposed to material participation, need not be regular,
continuous, and substantial. Active participation can include making some
management decisions (approving tenants, approving repairs and capital
expenditures, etc.). If a taxpayer qualifies as an active participant in his or her
rental real estate activities, then he or she has the potential to avoid the passive
loss limitations and deduct up to $25,000 of losses from such activities against
other nonpassive income. This treatment is limited to taxpayers with MAGI of
$100,000 or less. (7281)
Chapter 8
3. Macy had a lot of medical expenses this year that were not covered by her
insurance (either due to a deductible, co-insurance, or co-pay). Her un-reimbursed
qualifying medical expenses total $8,356 and her AGI for 2014 is $45,000. Assuming
she will itemize on her 2014 tax return, how much of her medical expenses will she
be able to deduct? (5 pts)
Medical expenses are deductible to the extent they exceed 10% of AGI. Macy's AGI
is $45,000, so her medical expense floor is $4,500 ($45,000 0.10). Therefore, her
deductible medical expenses are $3,856 ($8,356 - $4,500). (8065)

4. Heather and Terry have a mortgage on their primary residence of $750,000, and
a mortgage on their vacation home of $410,000. In 2014, they incurred $46,400 of

mortgage interest expense. How much, if any, of that interest is deductible on


Schedule A? (5 pts)
Taxpayers may deduct interest on their first and/or second home if they are
qualified residences.
Acquisition indebtedness is up to $1,000,000 of debt incurred to acquire, construct,
or substantially improve a qualifying residence. In this case, Heather and Terry have
indebtedness totaling $1,160,000.
You may arrive at a different conclusion if you allowed indebtedness up to
$1,100,000 in your calculation. In the text in section 8215, it states "The IRS has
taken the position that if the initial mortgage exceeds $1,000,000, up to $100,000
of the excess will qualify as home equity interest. Rev. Rul. 2010-25"
The literal reading of the code does not permit that. The Revenue Ruling discusses
two court cases that took differing positions, and the IRS takes yet another. The
holding reads, Indebtedness incurred by a taxpayer to acquire, construct, or
substantially improve a qualified residence can constitute home equity
indebtedness to the extent it exceeds $1 million (subject to the applicable dollar
and fair market value limitations imposed on home equity indebtedness by 163(h)
(3)(C))."
Recognizing the possibility for the additional $100K to qualify, full credit will be
awarded to students for either analysis.

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