[Lighthaven]

I’m confused about this mulitple choice question:

“Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S Corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?”

Answer:

Choice “a” is correct. In this case, Lane has a $20,000 net loss from passive activity [$15,000 S Corporation income (passive, in this case because the facts state Lane does not materially participate) minus the $35,000 rental real estate loss]. Thus, only $15,000 of the passive loss from real estate rental activity may be used to offset the $15,000 income from the S Corporation. The remaining $20,000 passive activity loss is carried forward to be used in future years.

I’ve seen this question answered many times on this forum, but only in regards to the mom/pop rule.

My question is, why is this $35,000 considered a passive loss if Lane materially participated? My Becker book states “a passive activity is any activity in which the taxpayer does not materially participate.”

Can anyone explain this to me? Thanks!

AUD - 83
REG - 81 (2x)
FAR - 78
BEC - 85

And that's all she wrote.