Explaining tax consequences of making passive activity

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Reference no: EM131004446

Claudio owns a passive activity that has a basis of $28,000 and a fair market value of $38,000. The activity has suspended losses of $16,000. To reduce their estate, every year Claudio and his wife give their son Anthony and his wife a gift of approxi- mately $40,000. During the year, Anthony sells stock that results in a $10,000 short- term capital loss. A friend of Claudio's suggests that he give his passive activity to An- thony. The friend says that this will allow Claudio to avoid tax on the $10,000 capital gain and let his son offset his short-term capital loss with the $10,000 ($38,000 - $28,000) gain from the sale of the passive activity. In addition, Claudio can use the suspended loss from the passive activity to offset his other ordinary income. Write a letter to Claudio explaining the tax consequences of making the passive activity a gift to his son.

Reference no: EM131004446

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