3) Wade owns two passive investments, Activity A and Activity B. heplans to disp

Question

3)

Wade owns two passive investments, Activity A and Activity B. heplans to dispose of Activity A, either in the current year or nextyear. Celene has offered to buy Activity A this year for an amountthat would produce a taxable passive gain to Wade of $100,000.However, if the sale, for whatever reason, is not made to Celene,Wade feels that he could find a buyer who would pay about $5,000less than Celene. Passive losses and gains generated (and expectedto be generated) by Activity B follow:

Two yearsago                                 ($35,000)

LastYear                                              (35,000)

ThisYear                                            (5,000)

NextYear                                            (20,000)

FutureYears                                            Minimal Profits

All of Activity B’s losses are suspended. Should Wadeclose the sale of Activity A with Celene this year, or should hewait until next year and sell to another buyer? Ade is in the 35%tax bracket.

Explanation / Answer

Since suspended losses can be carried forward, this year, the totalloss is -35000-35000-5000 = -75000. Next year the total losses is-75000-20000 = -95000 If he sold this year, he would be taxed for (100000 - 75000)*0.35 =8750 If he sold next year, he would be taxed for (100000 - 5000 -95000)*0.35 = 0 The difference in taxes is more than the $5000 loss. Assuming the losses in Activity B will continue irregardless of hisdecision with regards to Activity A, he should wait and sell itnext year to minimize taxes.

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.