Question 1

A taxpayer has a $10,000 loss from a rental real estate activity in which they actively participate. Their Modified AGI is $130,000. What is the allowable deduction under the 'Mom and Pop' exception?

Accepted Answer

1. Max Exception = $25,000. 2. Phase-out: ($130k - $100k) * 50% = $15,000 reduction. 3. New Limit = $25k - $15k = $10,000. 4. Actual Loss = $10,000. 5. Deductible = Lesser of Loss or Limit ($10,000).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying the reduction to the loss amount rather than the limit.

A taxpayer has a $10,000 loss from a rental real estate activity in which they actively participate. Their Modified AGI is $130,000. What is the allowable deduction under the 'Mom and Pop' exception?

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