[needhelpnow]

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?

Incorrect

B. $15,000

The correct answer is B.

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.

-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.

The “Fourth” part doesn’t make sense to me. Aren’t we supposed to subtract $25,000 from 20,000? I thought the formula is =25k-50% (AGI-100k). NOT as this example shows 35k-20k. Someone please explain and thank you!

[Anonymous]

I can't figure out what that answer explanation is doing. I'm pretty sure it's just wrong…

the first thing you see is MAGI is $165,000, given in the problem. with that much, the entire passive real estate loss allowance is going to be phased out:

the phaseout is 165,000 – 100,000 = 65,000 excess MAGI x 50% = $32,500. this number is greater than the $25,000 allowance so you automatically know none of the loss is going to be deductible using the allowance.

so then the only way you could deduct this loss is if it's used to offset passive income. you have $15,000 passive income from the S-corp, so you can deduct $15,000 of the loss as an offset against that, and that's your answer.

[Mary 2496]

The explanation with the question is too wordy. That person ^^ said it perfectly – very simple and correct. It's phased out due to AGI being over $150,000 so the taxpayer is limited to the $15,000 from the S corp. activity and can take only that amount as a loss.

[needhelpnow]

That actually makes sense..thank you guys!

[Author]

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