NINJA REG. MCQ – Passive activity loss. Please help!

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    Topic
  • #1382412
    cpa1982
    Participant

    NINJA Question –

    Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?

    A.
    $0

    B.
    $15,000

    C.
    $25,000

    D.
    $35,000

    Answer and Explanation:

    Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with rental real estate activities. This deductible loss is reduced (but not below zero) by 50% of the amount by which the modified adjusted gross income of the taxpayer for the year exceeds $100,000.

    First, the passive activities were netted $15,000 from the S corporation – $35,000 from the rental = $(20,000).
    Second, the salary of $160,000 is decreased by the net $20,000 passive activity loss for a modified AGI before limitation of $140,000.
    Third, the amount of $140,000 that exceeds $100,000 is multiplied by 50%, equaling $20,000.
    Fourth, the rental loss of $35,000 is decreased by the $20,000 limitation, leaving an allowable deduction of $15,000.

    MAGI is $165,000. By rule if AGI is over $150,000 you can’t deduct active rental loss. SO why answer is B but not A??

Viewing 8 replies - 1 through 8 (of 8 total)
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  • #1382426
    bean counter
    Participant

    I believe you need to factor in the passive loss and income before taking into account the limitation on AGI.

    160,000 salary
    15,000 income
    (35,000) passive loss
    ———
    140,000 AGI

    140,000 – 100,000 * 50% = 20,000

    35,000 passive loss
    20,000 limit
    ——-
    15,000

    BEC - 84 *
    AUD - 73, 76 *
    REG - 70, 72
    FAR - 09/08/16

    #1382433
    waffle_house
    Participant

    @beancounter

    Correct I forgot the $20k is the amount you cannot deduct and the max amount is 25k you can deduct. Right?

    #1382442
    cpa1982
    Participant

    Bean Counter,

    What I don't understand is that where is MAGI $165,000 came from? It doesn't make sense that there is MAGI number and they expect you to calculate another AGI number. Also formula is $25,000-50% (AGI over 100,000)

    so $25,000 – 50%(140,000-100,000) = $25,000-$20,000 = $5000. this question driving me nuts.

    #1382489
    waffle_house
    Participant

    @cpa1982

    Okay I just read Becker's answer for this question: (the answer choices below do not tie to your original question)

    Rule: Passive activity is any activity in which the taxpayer does not materially participate. A net passive activity loss generally may not be deducted against other types of income (e.g., wages, other ordinary or active income, portfolio income (interest and dividends), or capital gains). In other words, passive losses may generally only offset passive income for a tax year-the remaining net loss is generally “suspended” and carried forward to a year when it may be used to offset passive income (or when the final disposition of the property occurs). However, there is an exception (the “mom and pop exception,” as we refer to it in the textbooks) to this general rule. Taxpayers who own more than 10% of the rental activity, have modified AGI under $100,000, and have active participation (managing the property qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate. There is a phase-out provision for modified AGI from $100,000 − $150,000, and the deduction is completely phased-out for modified AGI in excess of $150,000.

    Choice “d” is correct. Per the above rule, unless an exception exists (and it does not in this case, as Lane's modified adjusted gross income is in excess of $150,000), passive losses may only offset passive income for a tax year (i.e., no “net loss” may exist). In this case, Lane has a $20,000 net loss from passive activity [$15,000 S Corporation income (passive, in this case because the facts state Lane does not materially participate) minus the $35,000 rental real estate loss]. Thus, only $15,000 of the passive loss from real estate rental activity may be used to offset the $15,000 income from the S Corporation. The remaining $20,000 passive activity loss is carried forward to be used in future years.
    Choice “a” is incorrect. Per the above rule, passive losses may generally only offset passive income for a tax year. Lane has passive income of $15,000 in the year; thus, passive loss up to $15,000 may be deducted from passive income.

    Choice “c” is incorrect. This answer option is an attempt to confuse the candidate into using the “mom and pop” exception, which applies when taxpayers who actively participate, own more than 10% of the rental activity, and have modified AGI under $100,000 are able to deduct up to $25,000 annually of net passive losses attributable to real estate. There is a phase-out provision for modified AGI from $100,000 − $150,000, and the deduction is completely phased-out for modified AGI in excess of $150,000. In this case, the facts state that Lane's modified adjusted gross income is $165,000; thus, Lane does not qualify to use the exception.

    Choice “b” is incorrect. This answer option assumes that the full amount of the rental real estate loss is deductible against the passive income from the S Corporation, and, thus, against Lane's other taxable income. As indicated in the rule above, unless an exception applies (it does not in this case), a net passive activity loss may not be deducted against other types of income (e.g., wages, other ordinary or active income, portfolio income (interest and dividends), or capital gains). Thus, the full $35,000 rental real estate loss is not deductible in the year by Lane.

    #1382519
    Sticky Nicky
    Participant

    Thats why i dont really like doing Ninja MCQs for REG…you will never see a question this much in depth…REG is very basic concepts..they dont like to trick you nor do they put in the minute little details,,,at least in my experience

    #1382583
    cpa1982
    Participant

    Sticky nicky,

    I hope you are somewhat right. This question is really ugly.

    #1382609
    cpa1982
    Participant

    waffle_house,

    Thanks for detailed explanation. I'm still confused why they say $165,00 MAGI and then expect you to calculate another AGI number. It doesn't make sense. If they had not given that number and expect us to calculate AGI number then it makes sense.

    First we calculate AGI which is $140,000. since AGI is between $100,000 and $140,000 we have to use formula $25,000 – 50% (AGI over 100,000) so $25,000 – 50% (140,000-100,000) = $5000 not $15,000

    The other scenario is since S-corp income is passive income, you can offset only $15000 loss against it. Also Lane “Materially Participate in rental activity” he can offset remaining losses against ordinary income which is $160,000-$20,000=$140,000. That means he deduct entire $35,000 lose against passive and ordinary income.

    #1383009
    Namstut
    Participant

    The Modified Adjusted Gross Income exceeds 150,000 therefore the $25,000 offset is not allowed.

    The amount of passive loss that the taxpayer is allowed is only up to the amount of passive income, which in this case is $15,000.

    The remaining $20,000 of passive income will be carried over until future passive income is available to offset passive losses or the income producing property is sold.

    AUD 7/6/16 Passed
    BEC 9/3/16
    FAR TBD
    REG TBD

Viewing 8 replies - 1 through 8 (of 8 total)
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