### What constitutes a passive loss? - [ ] Losses from a business activity in which the taxpayer actively participates. - [x] Losses from a business activity in which the taxpayer does not actively participate. - [ ] Losses from stock market investments. - [ ] Losses from wage and salary earnings. > **Explanation:** Passive loss generally results from a business activity in which the individual does not actively engage, such as renting out real estate by someone who is not in the business of renting or leasing property. ### Passive losses can generally be deducted against: - [ ] Active business income. - [ ] Wage and salary income. - [x] Passive gains. - [ ] Any type of income. > **Explanation:** Passive losses can only be deducted against passive gains for the year. If passive losses exceed passive gains, they can be carried over to future years. ### If a rental property has a profit of $10,000 and a loss of $6,000 in the same year, what will be the passive loss for that year? - [x] $6,000 - [ ] $10,000 - [ ] $4,000 - [ ] $16,000 > **Explanation:** In this scenario, a passive loss of $6,000 would be tax deductible for the year. The remaining profit is $4,000, which can be used to offset other passive losses or carried forward. ### Can passive losses be deducted from active income? - [ ] Yes, in all cases. - [ ] Yes, but only the first $3,000. - [ ] Yes, but only for rental real estate. - [x] No, they can only be deducted from passive income. > **Explanation:** Passive losses can generally only be deducted from passive income. They cannot be used to offset active income such as wages or salaries. ### What happens if passive losses exceed passive gains in a given year? - [ ] They are lost and cannot be used. - [ ] They can be deducted as active losses. - [x] They can be carried forward to the next year. - [ ] They can be converted into capital losses. > **Explanation:** If passive losses exceed passive gains, the excess loss can be carried forward to future years to offset future passive gains. ### For a taxpayer not in the business of renting property, rental income is considered: - [ ] Active income. - [x] Passive income. - [ ] Portfolio income. - [ ] Earned income. > **Explanation:** For a taxpayer not in the business of renting or leasing property, the income from rental property is generally considered passive income. ### Which of the following best describes the treatment of a $4,000 passive loss carried over to the next year? - [ ] It is forfeited. - [ ] It can offset active income the following year. - [x] It can offset future passive gains. - [ ] It is used to reduce stock market losses. > **Explanation:** Passive losses that cannot be used in the current year can be carried forward to offset future passive gains. ### If a taxpayer has a passive loss that cannot be deducted this year, what is the correct course of action? - [ ] Include it as earned income next year. - [ ] Disregard it, as it is not deductible. - [x] Carry it forward to the next tax year. - [ ] Convert it into an active loss. > **Explanation:** Passive losses that exceed passive gains can be carried over to the following year to be used against future passive gains. ### Which activity would typically generate a passive loss? - [ ] Working a salaried job. - [ ] Running a small business day-to-day. - [x] Renting out a residential property by a non-professional landlord. - [ ] Day trading on the stock market. > **Explanation:** Non-professional renting of residential property is a common example of a passive activity that might generate a passive loss. ### Are passive income and passive losses relevant in determining self-employment tax obligations? - [ ] Yes, because they are subject to self-employment tax. - [ ] Only passive income is relevant. - [ ] Only passive losses are relevant. - [x] No, neither passive income nor passive losses affect self-employment tax. > **Explanation:** Passive income and passive losses do not affect self-employment tax, which is applied to earned income from active business activities.