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Layla made a personal loan of $23,000 to Natalie several years ago, so that she could meet personal obligations. The loan was evidenced by a promise to pay and was to bear interest at the prevailing market rate. Two years ago, Natalie repaid $7,000 of the loan. On June 30 of the current tax year, Natalie filed for bankruptcy, and settlement was made with her creditors. Under the bankruptcy plan, Layla received only $1,000 in settlement of her claim in the current tax year. This is the only gain or loss incurred by Layla in the current tax year. On her current year income tax return, Layla may deduct

a. $3,000 as a long-term capital loss

b. $3,000 as a short-term capital loss

c. $15,000 as a short-term capital loss

d. $15,000 as an ordinary loss

Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $75,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

a. Zero; losses from rental property are passive losses and can only be offset by passive income.

b. $4,000

c. $11,000

d. $15,000

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