Question

Cory owns an apartment building and incurred a $35,000 rental loss. Janelle has no other passive activities and is not a real estate professional. She actively participates in renting the building. Her income is:

Form W-2 wages $30,000

Schedule C proprietorship                                           90,000

Schedule E rental loss ( 35,000)

IRA deduction 2,000

**What amount of rental loss is allowed?**

**Explain the rule on rental loss and provide the calculation and answer of your decision.**

Answer 1

Having a rental loss is stated as a part of passive income.

Rule of rental loss:

Passive losses can be set off only against passive income. They cannot be deducted from active income sources just like wages, salary or investments.

Exception:

Property owners with modified adjusted gross incomes (MAGI) of $100,000 or less may deduct up to $25,000 in rental real estate losses per year if they "actively participate" in the rental activity. You actively participate if you are involved in meaningful management decisions regarding the rental property and have more than a 10% ownership interest in the property. This allowance is phased out for taxpayers whose MAGI exceeds $100,000 and ruled out completely when it exceeds $150,000.

In this case, Cory is actively participating in the rental activity, hence deduction up to $25000 is allowable.

Calculations:

Wages $30000

Business Income $90000

Rental Loss ($25000)

IRA Deduction ($2000)

Total Income $93000