Question

Chewy owns 25 percent of a house in the nearby college town of with three other friends. The house is rented to students who attend the local college. Chewy’s responsibility is to approve new tenants each year and take care of any maintenance issues. During the year, the rental property generated a $26,400 loss, which was split equally among the four owners. Assuming Chewy’s only source of income was $145,700 of salary, how much of the rental loss can Chewy deduct this year? (Assume he had sufficient tax basis and at-risk amounts)

Answer 1

As per IRS Publication 925 (2019) the rent forms part of a passive activity. For passive losses, the amount would be capped at $25,000 on an annual basis with no carryover.

However, since there are 4 people, each can claim a maximum of $6,250 as a loss.

But there is a catch. Since Chewy has a salary greater than $100,000 the amount would be phased out. The phase-out rule is as such: 1$ will be phased out for every $2 over $100,000 of MAGI (Modified Adjusted Gross Income). To reach this, I will be deducting his salary by $12,400(Standard Deduction). This gives us the number $133,300 as MAGI. As a result of this Chewy's loss has been phased out and he will not be able to deduct any rental loss for the year.

P.S - I am assuming here that Chewy has participated in managing the house for at least 100 hrs in the year and has documents to prove the same.