A taxpayer has a $10,000 passive activity loss from a rental real estate activity in the current year. The taxpayer is an active participant in the rental activity and has Modified Adjusted Gross Income (MAGI) of $130,000. What amount of the loss can be deducted against ordinary income in the current year?

Answer options:

$25,000

$10,000

$5,000

How to approach this question

1. Start with $25,000 Mom & Pop allowance. 2. Calculate phase-out: (MAGI - $100,000) * 50%. 3. Subtract phase-out from $25,000. 4. Compare to actual loss.

Full Answer

B.$10,000✓ Correct

The $25,000 allowance for active participation rental real estate losses is reduced by 50% of the amount by which MAGI exceeds $100,000. Excess MAGI = $130,000 - $100,000 = $30,000. Reduction = $30,000 x 50% = $15,000. Remaining allowance = $25,000 - $15,000 = $10,000. Since the loss ($10,000) does not exceed the remaining allowance, the full $10,000 is deductible.

Common mistakes

Forgetting the 50% reduction factor.

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