- Which statement is correct for Alex's 2025 return?
Answer: Alex qualifies as a real estate professional, so the $30,000 current-year loss is nonpassive, but the $12,000 suspended loss from 2024 remains passive and is not deductible against his other income.
IRC §469(c)(7) and §469(f)(1). Alex meets the real estate professional tests: his 2,400 hours in his brokerage and rental management are more than half of his personal services and exceed 750 hours, and he materially participates in each rental. The current-year rental loss is therefore nonpassive. Under §469(f)(1), however, the $12,000 suspended from 2024, when the activity was passive, remains a passive activity loss; it is not deductible against other income. Choice A incorrectly releases the prior suspended loss. Choice B misstates the 750-hour and brokerage service rules. Choice D ignores the real estate professional exception.
- During 2025, a taxpayer owned a lakeside cottage that she rented at fair rental value for 90 days and used for personal purposes for 30 days. Gross rental income for the year was $18,000. Her expenses for the year were: mortgage interest of $12,000; property taxes of $6,000; utilities and repairs of $4,000; and depreciation of $8,000. The taxpayer actively participated in the rental activity and uses the actual-expense method. What net rental income or loss must she report on Schedule E for the cottage?
Answer: $0 net income or loss
IRC § 280A(c)(5) and (d)(1). Because the taxpayer's personal use (30 days) exceeds the greater of 14 days or 10% of the rental days (10% × 90 = 9), the cottage is a dwelling unit used as a residence, so the deductions attributable to rental use—other than mortgage interest and property taxes—are limited to the excess of gross rental income over the rental share of interest and taxes. The rental-use ratio is 90/(90+30)=75%. Tier 1: the rental shares of mortgage interest and property taxes (75% × $12,000 plus 75% × $6,000 = $13,500) are deductible without regard to the limit, leaving $18,000 − $13,500 = $4,500. Tier 2: the rental share of utilities and repairs (75% × $4,000 = $3,000) is deductible, leaving $1,500. Tier 3: the rental share of depreciation is 75% × $8,000 = $6,000, but it is limited to the remaining $1,500. Total rental deductions equal $18,000, so Schedule E shows $0 net income or loss. The §469(i) active-participation allowance cannot apply because §280A eliminates the loss before the passive activity rules come into play. The personal-use shares of the interest and taxes are not Schedule E items; they are considered on Schedule A only if the taxpayer itemizes. Choice A ($12,000 net loss) deducts 100% of every expense, ignoring the allocation for personal use. Choice B ($4,500 net loss) uses the correct 75% allocation but ignores the §280A(c)(5) gross-income ceiling by deducting the full rental shares of utilities and depreciation. Choice D ($10,603 net income) allocates the expenses over 365 days (90/365), but for a vacation home the denominator is total days of rental and personal use (120 days), not days in the year.
- Which statement is correct about Priya's $10,000 loss?
Answer: The loss is nonpassive and deductible against her other income because the average customer stay is seven days or less and she materially participates in the activity.
Treas. Reg. §1.469-1T(e)(3) and IRC §469(h). An activity involving the use of tangible property is not a rental activity if the average period of customer use is seven days or less. Because Priya's average stay is four days and she materially participates, the activity is not passive, and the loss may offset her other income. Choice B treats all real estate rentals as per se passive. Choice C reverses the seven-day rule by requiring significant services. Choice D mischaracterizes short-term rental income as portfolio income.
- How are the suspended passive activity losses treated?
Answer: The $28,000 is allowed proportionately as the gain from the installment sale is recognized over the payment period under section 453.
IRC § 469(g)(1)(A) and (g)(3). A complete disposition of an entire interest in a passive activity generally releases suspended losses, but for an installment sale the losses are allowed as the gain is recognized over the payment period under section 453. Choice A states the general disposition rule but ignores the installment-sale special rule. Choice B wrongly delays allowance until the final payment. Choice C wrongly requires current passive income, which §469(g) does not require on a disposition.
- What is the correct treatment of the condo on Rosa's 2025 return?
Answer: She must exclude the $4,800 from gross income and may deduct none of the insurance, maintenance, or depreciation; the mortgage interest and property taxes remain deductible only if she itemizes.
IRC §280A(g). Because Rosa used the unit as a residence and rented it for fewer than 15 days, all rental income is excluded and no deductions attributable to the rental use are allowed. The mortgage interest and property taxes are not Schedule E rental deductions; they may be claimed on Schedule A only if she itemizes. Choice A applies the general vacation-home ceiling instead of the fewer-than-15-day rule. Choice C treats otherwise itemized expenses as Schedule E rental expenses. Choice D mischaracterizes excluded rent as other income.
- Which statement is correct about Elena's 2025 tax treatment?
Answer: The sister's occupancy is counted as Elena's personal use because the rent was below fair rental value, so the townhouse is used as a residence and rental deductions may not exceed rental income.
IRC § 280A(d)(2)(A) and (C); IRC § 280A(d)(3). Under § 280A(d)(2)(A), a day on which a member of the taxpayer's family uses the unit is a day of personal use by the taxpayer, and under § 280A(d)(2)(C) so is a day on which any individual uses it for less than fair rental. The §280A(d)(3) principal-residence exception applies only to family-member rentals at a fair rental. Because Elena's sister paid only 60% of fair rent, her occupancy counts as Elena's personal use. Adding Elena's 10 personal days gives personal use well in excess of the greater of 14 days or 10% of the 40 fair-rental days, so the townhouse is a residence. Under §280A(c)(5), rental deductions for 2025 may not exceed rental income, so the $9,000 loss is not allowable for 2025. Choice B assumes the principal-residence exception applies without fair rent. Choice C treats below-market family occupancy as rental use. Choice D ignores that below-fair-rent family use is personal use.
- Which of the following is correct regarding the conversion of a personal residence to residential rental property in 2025?
Answer: Depreciation is calculated on the lesser of the taxpayer's adjusted basis in the residence at the time of conversion or its fair market value at that time.
Treas. Reg. §1.167(g)-1. When residential property is converted from personal use to rental use, the basis for depreciation is the lesser of the adjusted basis at conversion or the fair market value at conversion. This prevents a taxpayer from depreciating personal-use appreciation or from turning a pre-conversion decline in value into a deductible loss through depreciation. Choice C states the rule. Choice B misstates the sale basis after conversion: basis for gain remains adjusted basis, so the pre-conversion decline is not recognized merely because fair market value was lower at conversion. Choice A is wrong because the fair market value cannot be used as the depreciation basis when it exceeds adjusted basis. Choice D ignores the fair-market-value cap at conversion when adjusted basis is higher.
- Which of the following is correct regarding the treatment of a residential rental activity under the passive activity loss rules for 2025?
Answer: An individual who does not qualify as a real estate professional generally must treat rental real estate as a passive activity even if he actively participates in managing the property.
IRC §469(c)(2) and (7). Rental activities are generally passive for an individual. Active participation under §469(i) qualifies losses for the limited rental real estate loss allowance, but it does not convert the activity into a nonpassive activity; a taxpayer satisfying the real estate professional requirements may have rental losses treated as nonpassive, but only if the taxpayer also materially participates in the activity (or the combined activity if the §469(c)(7) election is made). Choice B misstates the election: the election aggregates rental interests but does not remove the material participation test. Choice C uses a half-time standard but omits the statutory 750-hour test and the material participation requirement and confuses active management with the real estate professional exception. Choice D mislabels the result: losses that escape the passive category are nonpassive, not portfolio, losses.
- Which of the following is correct regarding amounts received from a tenant of residential rental property in 2025?
Answer: A refundable security deposit is not income when received, but the part of the deposit later retained because the tenant breached the lease is included in rental income in the year retained.
Treas. Reg. §1.61-8(b) and (c); IRS Pub. 527. A true security deposit is not income when received because the landlord has an obligation to return it; if the landlord later keeps all or part of it because of the tenant's default, the amount kept is rental income in that later year. Choice A states that rule. Choice B misstates the treatment of a deposit that is earmarked for the final rent period: a deposit intended to satisfy rent is advance rent and is taxable when received, not when the lease period arrives. Choice C treats a nonrefundable pet fee as a return of capital, but a nonrefundable fee for the tenant's use of the property is compensation for use and is income when received. Choice D reverses the rule for advance rent, which is included in income in the year received regardless of when the services are performed.
- A taxpayer owns a rental condominium that is her only passive activity. At the beginning of 2025 she has $28,000 of suspended passive activity losses from the condominium. In 2025, before considering the sale, the rental activity produced a $12,000 loss. On December 15, 2025, she sold her entire interest in the condominium in a fully taxable transaction to an unrelated buyer for $250,000; her adjusted basis immediately before the sale was $180,000. She is not a real estate professional and has no other passive income or losses in 2025. What amount of gain from the sale must she recognize in 2025?
Answer: $70,000 of gain
IRC § 1001(a) and IRC § 469(g)(1)(A). The gain recognized on a sale is the amount realized less adjusted basis: $250,000 - $180,000 = $70,000, which is Choice C. Section 469(g)(1)(A) does not change that gain. When a taxpayer disposes of her entire interest in a passive activity in a fully taxable transaction to an unrelated party, the current-year loss ($12,000) and the suspended losses ($28,000) are released and allowed as deductions; to the extent they exceed net passive income (here the $70,000 gain), they are treated as not passive. The $40,000 of released losses is deducted separately on Form 8582 and Schedule E; it reduces her taxable income, not the gain she recognizes on Form 4797. Choice A ($30,000 of gain) nets all $40,000 of released passive losses against the gain, confusing the net effect on income with the gain recognized. Choice B ($58,000 of gain) nets the $12,000 current-year operating loss against the gain on the sale. Choice D ($110,000 of gain) subtracts the $40,000 of losses from the $180,000 adjusted basis, although the stated basis immediately before the sale already reflects all depreciation.
- Which of the following is correct regarding suspended passive activity losses when a taxpayer disposes of a rental real estate activity?
Answer: If the taxpayer sells the entire interest in the activity to an unrelated person in a fully taxable transaction, the suspended losses are allowed in full in the year of the sale.
IRC §469(g). A fully taxable sale of the taxpayer's entire interest in a passive activity to an unrelated person releases all suspended passive losses in the year of sale; they are no longer treated as passive. Choice B is correct. Choice A misstates the installment-sale rule: under §469(g)(3), suspended losses are allowed in the ratio that gain recognized bears to total gain, not all in the year of sale. Choice C misstates the death rule: §469(g)(2) allows suspended losses on the decedent's final return to the extent they exceed the basis step-up. Choice D misstates the gift rule: a gift is not a fully taxable disposition, and under §469(j)(6) the suspended losses generally increase the donee's basis rather than being allowed to the donor.
- During 2025, a taxpayer rented a condominium at fair rental for 90 days and personally used it for 20 days. Which of the following is correct regarding the real property taxes on the condominium?
Answer: The rental-use share of the real property taxes is reported on Schedule E; the personal-use share is deductible on Schedule A only if the taxpayer itemizes and is subject to the SALT cap.
IRC §280A(c)(5), §280A(e), and §164(b)(6); Schedule E instructions. Because the taxpayer rented the condominium for 90 days and personally used it for 20 days, the unit is a dwelling unit used as a residence, and the real property taxes must be allocated between rental use and personal use. The rental-use share is reported as a rental expense on Schedule E, subject to the §280A(c)(5) gross-income limitation; the personal-use share is deductible on Schedule A only if the taxpayer itemizes and is subject to the SALT cap. Choice B misstates the rule by placing the entire deduction on Schedule E without allocating the personal-use share. Choice C misstates the SALT cap: the personal-use share is subject to the cap, while the rental-use share reported on Schedule E is not. Choice A is incorrect because the residence classification and the rental-income limitation do not make the real property taxes wholly nondeductible; they remain deductible under the allocation and itemized-deduction rules.
- How should Kay treat the loss for 2025?
Answer: She may deduct the $6,000 loss because the condo is not a dwelling unit used as a residence and her active participation makes the loss allowable under the rental real estate loss allowance.
IRC §280A(d)(1) and IRC §469(i). A dwelling unit is used as a residence only if personal use exceeds the greater of 14 days and 10% of rental days. Here the greater threshold is 14 days; Kay's 13 personal-use days do not exceed it, so the §280A(c)(5) rental-income ceiling does not apply. Because Kay is unmarried, the rental is a rental real estate activity in which she actively participates, and her modified AGI is below the phase-out range, the loss qualifies for the rental real estate loss allowance. Choice A applies only the 10% branch. Choice C ignores the active-participation allowance. Choice D invents a personal-use bar to Schedule E losses.
- What is Kai's depreciable basis in the building?
Answer: $214,200
IRC §§1012 and 168(a). Kai's basis in the property includes the $300,000 purchase price plus the $6,000 capital acquisition costs, for a total of $306,000. Land is not depreciable, so the total must be allocated by relative fair market value: 210,000/300,000, or 70%, is allocable to the building. $306,000 × $210,000 / $300,000 = $214,200. Choice A omits the closing costs. Choice C adds all closing costs to the building rather than allocating them. Choice D treats the land as depreciable.
