Question

12.20 Passive-Activity Limitations: Rental Property. L, single, is the chief of surgery al a local hospital. During the year, L earned a salary of $120.000. L owns a four unit apartment building that she rents out unfurnished. The current tenants have one-year leases, which expire at various times. This year, the property produced loss of $30,000 due to accelerated depreciation. L is actively involved in the rema activity, making many of the decisions regarding leases, repairs, etc. a. How much of the loss may L deduct? b. Would the answer to (a) change if L materially participated?

Answer 1

a. Passive activity is any activity or business in which the taxpayer do not materially participate. Generally, passive activity losses are limited for income tax purposes because passive losses can only be set off from passive income. However, the rental real estate losses are allowed as a tax deduction if the property is in US. Under the tax code, taxpayers are allowed to deduct upto $25,000 per year as rental loss if the adjusted gross income is $100,000 or less. As per the phaseout rule, the maximum special allowance of $25,000 get reduced by 50% of the amount of adjusted gross income that is more than $100,000.

Adjusted gross income = $120,000

Amount subject to phaseout rule = $120,000 - $100,000 = $20,000

Required reduction to special allowance = 50% of $20,000 = $10,000

Maximum Special allowance = $25,000

Adjusted special allowance = $25,000 - $10,000 = $15,000

Passive loss from rental real estate = $30,000

Deduction allowable = $15,000

L can deduct a loss of $15,000 .

b. Rental activities are passive activities even if materially participated. Hence, answer to (a) will not change if L materially participated.