[phson01]

NINJA Question –

This is about passive loss deduction in individual taxation

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: B is correct. Here is the explanation (which get me confused.)

Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with rental real estate activities. This exemption is reduced (but not below zero) by 50% of the amount by which the 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 (WHY?? DID THE QUESTION NOT SAY THE MODIFIED AGI IS $1,6500??).

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. (WHY IS IT TAKING 20K OUT OF THE 35K LOSS INSTEAD OF THE 25K DEDUCTION LIMITATION?? IS IT SUPPOSE TO BE 25K LIMITATION – 20K PHASEOUT = $5000 DEDUCTIBLE??)

Sorry for using capped letters, try to distinguish my words from the answer explanation.

Any help would be appreciated….thank you!!!

FAR - 76...PASSED (NOV 2013)
BEC - 86...PASSED (MAY 2014)
AUD - 85...PASSED (OCT 2014)
REG - 81...PASSED (NOV 2014)
Ethics - 100% DONE!!!

Becker Final Review (book/lecture), NINJA Notes, Wiley Test Bank.

[kenster7773]

The explanation is certifiably horrible! The simple answer goes like this: you can deduct passive losses against passive income. You have $15K of passive income from the S Corp; therefore, you can deduct $15K of the real estate loss. That simple. Now, if your modified adjusted gross income is less than $100K you may deduct up to $25,000 in rental real estate losses per year if you “actively participate” in the rental activity. You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. This allowance is phased out for taxpayers whose MAGI exceeds $100,000 and eliminated entirely when it exceeds $150,000. Thus, it is useless for high-income landlords. However, since your modified AGI is over $150K you can disregard this completely for this problem.

AUD - 95 (89 1st time - expired)
BEC - 85 (1st time)
REG - 87 (1st time)
FAR - 82 (1st time)

[Anonymous]

Great explanation @kenster7773, now can you go a couple threads down and answer my question too? 🙂

[phson01]

Thank you!!! @kenster7773

Your explanation makes much more sense, I understand it now!

FAR - 76...PASSED (NOV 2013)
BEC - 86...PASSED (MAY 2014)
AUD - 85...PASSED (OCT 2014)
REG - 81...PASSED (NOV 2014)
Ethics - 100% DONE!!!

Becker Final Review (book/lecture), NINJA Notes, Wiley Test Bank.

[SullivanNJD]

this question still confuses me. Does it mean how much of the real estate activity you can offset agains other passive activity? Because the call of this question states what can be deducted and wouldnt that be zero due to the 150,000 complete phaseout?

FAR- 87
REG- 81
AUD- 88
BEC-

Who's Better Than Us? nobody

[Author]

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