[Oogbor]

Can someone please help me understand why $35,000 is the answer for the following below?

Lane, a single taxpayer, received $105,000 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. What amount of the real estate rental activity loss is deductible?

Correct! Lane’s entire $35,000 loss is deductible. Since the $15,000 of S corporation income is passive income (i.e., Lane does not materially participate in the activity), Lane can first offset $15,000 of the rental loss with this income. (Note: Rental activities are considered passive activities regardless of whether the taxpayer materially participates, unless the taxpayer qualifies as a “real estate professional” engaged in a “real property trade or business.”) A taxpayer who materially participates in a rental activity may also deduct up to $25,000 of loss from such activities against active income; however, this limitation is reduced by $0.50 for every dollar of AGI over $100,000. Lane’s AGI for this purpose includes only his $105,000 salary, so his AGI exceeds $100,000 by $5,000, reducing the limit by $2,500 ($5,000 X 0.5) to $22,500, which still allows him to deduct the remaining $20,000 of the $35,000 loss.

[Lentilcounter]

There is a total of $35k of rental activity loss. Also, there is a mom and pop rule that says you can deduct up to $25k in passive losses against ordinary income. This rule is subject to AGI phase out rules which come into play in this problem. As a result, the $25k is reduced to $22.5k maximum. The income from the S Corp is passive in nature.

First take $35k-$15k = $20K. You are netting passive losses against passive income. Then per the mom and pop rule, the additional $20K of passive losses can be deducted against active/ordinary income.

So the total deductible is $35K.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Author]

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