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 A.
$0
B.
$15,000
C.
$25,000
D.
$35,000
You answered A. 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.
As per my understanding, for this MCQ applies the “Mom and Pop” exception which stated that taxpayer may deduct up to $25,000 until the AGI is $100,000 and any amount above $100,000 is reduces by a 50% until AGI exceed the $150,000. In this MCQ, AGI was $165,000 so I suppose that the exception does not apply.
Anyone can help me to clarify this?, please. I will very appreciate!
Thanks!
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