Question
Grettas parents, Hans and Helga, are doing fairly well financially. Hans has retired from his law practice and now spends his time in large part
Grettas parents, Hans and Helga, are doing fairly well financially. Hans has retired from his law practice and now spends his time in large part playing with his money. He retired three years ago from a large Chicago law firm where he put together multinational ventures for German automakers and manufacturing concerns.
Hans and Helga saved and set aside much of his earnings from his full-time work during their forty years of marriage, and now have a tidy nest egg to invest. For 2019, their income and loss results from various holdings include:
- Helga received $14,000 for consulting work for local nonprofit organizations, reported to her on IRS Forms 1099. She spends about 75 hours per year consulting with nonprofit agencies.
- $48,000 in interest income on various U.S. Treasuries and corporate bonds.
- $145,000 in dividends from various publicly held corporations.
- Net long term capital gains of $124,000 on sales of marketable securities.
- Hans received a Form K-1 from his law firm (as he still holds an equity interest in the partnership), with his allocable share of the net income totaling $163,000.
- Hans received a K-1 from a technology company, in which he invested but is not involved in the activity, with a loss of $85,000.
- Hans received a K-1 from a real estate management LLC, in which he invested but is not involved in the activity, with income of $55,000.
- Helga received a K-1, with net income of $19,000, for having invested in a private digital marketing company with 50 employees that her friend started (and the friend manages full time). Helga prepares for and attends the quarterly board of advisors meetings, reviews monthly financial reports, and spends about 150 hours a year contributing on company matters.
- What do you calculate to be the net passive income or loss for Hans and Helga?
- After you have provided answers above to Hans, he tells you he spends about 50 hours per month (600 per year) researching and managing his investment portfolio of stocks and bonds. Regardless of your answers above, would this cause his income from those investments to be material participation income in the passive activity bucket?
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