A single taxpayer has Adjusted Gross Income (AGI) of $140,000. They actively participate in a rental real estate activity that generated a $20,000 loss. How much of this loss is deductible in the current year?

The $25,000 rental real estate exception phases out by 50% of AGI over $100,000. Excess AGI = $140,000 - $100,000 = $40,000. Reduction = $40,000 * 50% = $20,000. Max deduction = $25,000 - $20,000 = $5,000. Since the actual loss ($20,000) > limit ($5,000), only $5,000 is deductible.