A taxpayer owns a rental real estate activity in which they actively participate. In Year 1, the activity generates a loss of $30,000. The taxpayer's Modified Adjusted Gross Income (MAGI) is $130,000. They have no other passive income. What amount of the rental loss is deductible in Year 1?

Answer options:

$25,000

$10,000

$15,000

How to approach this question

Calculate phase-out for the $25k Mom & Pop exception. Reduction = (MAGI - 100,000) * 50%. Subtract reduction from $25,000.

Full Answer

B.$10,000✓ Correct

IRC §469(i). Active participation rental real estate allowance is $25,000. Phase-out: $0.50 for every $1 of MAGI over $100,000. <br/>MAGI = $130,000. Excess = $30,000. <br/>Reduction = $30,000 * 0.50 = $15,000. <br/>Allowable Loss = $25,000 - $15,000 = $10,000.

Common mistakes

Forgetting the phase-out or applying it incorrectly.

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