A taxpayer actively participates in a rental real estate activity and incurs a loss. To what extent is their ability to deduct this loss restricted?
Understand the Problem
The question is asking about the deductibility of a loss incurred from rental real estate activity, specifically when the taxpayer actively participates. We need to identify the correct rule regarding the deduction limit, considering potential restrictions like passive activity loss rules and adjusted gross income limitations.
Answer
Taxpayers can deduct up to $25,000 of rental real estate losses if they actively participate, subject to income limitations.
Taxpayers who actively participate in rental real estate may deduct up to $25,000 of losses from nonpassive income. This allowance is phased out for taxpayers with a modified adjusted gross income (MAGI) between $100,000 and $150,000 and is fully eliminated at $150,000.
Answer for screen readers
Taxpayers who actively participate in rental real estate may deduct up to $25,000 of losses from nonpassive income. This allowance is phased out for taxpayers with a modified adjusted gross income (MAGI) between $100,000 and $150,000 and is fully eliminated at $150,000.
More Information
The $25,000 allowance is reduced if adjusted gross income is more than $100,000 and fully eliminated once it reaches $150,000.
Tips
It is easy to confuse the requirements for real estate professionals and those who actively participate. Real estate professionals have more relaxed rules.
Sources
- Topic no. 425, Passive activities – Losses and credits - IRS - irs.gov
- Special $25,000 allowance - irs.gov
- Rental Real Estate Loss Allowance: Definition and Who Qualifies - investopedia.com
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