Accredited Wealth Management Advisor Practice Exam

What is the income tax result of David’s sale of the commercial property?

1. The $410,000 loss is treated as an ordinary loss, and may be deducted in full against David's ordinary income.

2. Of the $210,000 loss, $3,000 may be used to offset ordinary income in the current year, and the remainder may be carried forward.

3. The $210,000 loss is treated as a capital loss, and may not offset ordinary income.

4. The $210,000 loss is treated as an ordinary loss, and may be deducted without limit against David's ordinary income.

The correct answer is: The $210,000 loss is treated as an ordinary loss, and may be deducted without limit against David's ordinary income.

The income tax result of David's sale of the commercial property involves the treatment of the loss incurred from the sale. When a commercial property is sold at a loss, the nature of that loss is significant in determining how it can be used for tax purposes. In this case, if the loss is classified as an ordinary loss rather than a capital loss, it provides a more favorable tax treatment. Ordinary losses can be deducted in full against ordinary income without any limitation, allowing David to reduce his taxable income significantly. This aspect is vital because it permits the taxpayer to recover the full amount of the loss against other forms of income, which can be beneficial in lowering the overall tax burden. The correct classification of a loss from the sale of commercial property is often determined by the nature of the property and the context of the sale. Since the question indicates that the loss is treated as an ordinary loss, it signifies that the property was used in a trade or business activities, thus enabling it to be fully deductible against David's ordinary income. This option stands out as it directly correlates with the taxation rules governing loss deductions for properties used in a business, emphasizing the advantage of deducting the entire amount without any restrictions.