A taxpayer has a $20,000 loss from a rental real estate activity in which they actively participate. The taxpayer's Modified Adjusted Gross Income (MAGI) is $130,000. How much of the loss can be deducted against ordinary income in the current year?

Answer options:

$20,000

$10,000

$5,000

How to approach this question

Mom & Pop Exception: $25,000 max deduction. Phase-out range $100k-$150k. Reduction = (MAGI - 100k) * 50%.

Full Answer

B.$10,000✓ Correct

Taxpayers who actively participate in rental real estate can deduct up to $25,000 of losses against non-passive income. This allowance is reduced by 50% of the amount by which MAGI exceeds $100,000. Excess = $30,000. Reduction = $15,000. Allowable deduction = $10,000.

Common mistakes

Forgetting the phase-out or applying it to the loss amount rather than the $25k limit.

Question 27 All questions Question 29

Practice the full CPA REG Practice Exam 5

72 questions · hints · full answers · grading

More questions from this exam

Q01A CPA is representing a client, TechSolutions Inc., in an IRS examination regarding a large resea...Hard Q02A tax return preparer is engaged to prepare a return for a client who has engaged in a transactio...Hard Q03Which of the following statements accurately describes the disciplinary authority of a State Boar...Hard Q04A taxpayer filed their Year 1 individual income tax return on March 15, Year 2. The return showed...Hard Q05A taxpayer disagrees with a proposed IRS deficiency and wishes to litigate the matter. The taxpay...Hard

View all 72 questions →