Question 1

A taxpayer has the following income and losses for Year 1:
- Salary: $200,000
- Interest Income: $5,000
- Loss from Partnership A (Material Participant): ($30,000)
- Loss from Partnership B (Passive Activity): ($40,000)
- Income from Partnership C (Passive Activity): $15,000
- Active Rental Real Estate Loss: ($28,000)

The taxpayer's Modified Adjusted Gross Income (MAGI) before passive losses is $140,000. What is the total amount of losses deductible against the taxpayer's ordinary income (Salary and Interest) for Year 1?

Accepted Answer

1. Identify activity types: Active (Salary, Partnership A), Portfolio (Interest), Passive (Partnership B, C, Rental).
2. Net Passive Activities: Partnership B ($40k) + Partnership C $15k = ($25k) Net Passive Loss. Suspended.
3. Rental Real Estate Exception (Mom & Pop): Max $25,000 deduction.
4. Calculate Phase-out: Reduced by 50% of MAGI over $100,000.
5. Sum deductible losses.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Ignoring the MAGI phase-out for rental real estate or failing to net passive income against losses before applying the exception.

How to approach this question

Full Answer

Common mistakes

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