[Oneday]

Here’s the problem:

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?

A.$0

B.$15,000

C.$25,000

D.$35,000

*** Hi, from this question, why don’t we consider the $165,000 as part of the calculation for the rent deduciton? Since its over $150,000, shouldn’t the answer be A? This question is from Ninja MCQ but the answer solution tells us to calculate the modified AGI using the given info..

Here’s the solution given:

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Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with rental real estate activities. This deductible loss is reduced (but not below zero) by 50% of the amount by which the modified adjusted gross income of the taxpayer for the year exceeds $100,000.

First, the passive activities were netted $15,000 from the S corporation – $35,000 from the rental = $(20,000).

Second, the salary of $160,000 is decreased by the net $20,000 passive activity loss for a modified AGI before limitation of $140,000.

Third, the amount of $140,000 that exceeds $100,000 is multiplied by 50%, equaling $20,000.

Fourth, the rental loss of $35,000 is decreased by the $20,000 limitation, leaving an allowable deduction of $15,000.

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Thanks!

[Anonymous]

Someone else had the same question in the REG study group & below was my answer (pg 18 of the thread, I think).

The answer given does not appear to follow the IRS guidelines, unless I am missing something. First, the limit is $25,000 for Single & MFJ filing statuses & $12,500 for MFS. Second, the info I am looking at right now (the 1040 Deskbook), says that to get the modified AGI before limitation, you do not consider the rental (or any passive) loss deduction, so you have to add that back.

I do not agree with the answer given. The problem gives you the “modified AGI” which is what you are supposed to use to calculate any reduction of the $25k limit. Since modified AGI is above $150k, the $25k deduction is reduced to zero & the only amount deductible is the amount that can reduce any passive income. I don't understand the explanation given & don't think it is correct, but I could be missing something. I think if you try to learn the rules & how to apply them, you will be fine. I would just move on from this question & if you need further guidance or want to see some other examples, try searching on the IRS website or even just Google it. I am happy to try to help, but I in no way consider myself an expert! 🙂

Not that I think you will need this level of detail, but in case you are curious… here are the rules to get from tentative AGI to modified AGI under IRC Sec. 469(i)(3)(F):

“The $25,000 rental realty loss allowance is reduced by 50% of the amount by which modified AGI exceeds $100,000. Modified AGI (MAGI) is AGI computed without regard to any (1) passive loss deductions, (2) IRA deductions, (3) taxable social security and railroad retirement benefits, (4) income exclusion for interest on U.S. Series EE or I bonds used for higher education, (5) income exclusion for employer-provided adoption assistance, (6) deduction for interest on higher education loans, (7) deduction for qualified tuition and related expenses, (8) the Section 199 domestic production activities deduction, or (9) rental real estate losses considered nonpassive because the taxpayer is a real estate professional who materially participates in the activity.”

[Oneday]

Thanks for the answer! I also was looking at the same rule and it had me to think on this problem for hours!!!!!

I hope someone official from Ninja MCQ could give firm answer on whether this question is indeed wrong or correct.

[Author]

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