Barry is a lawyer who owns 10 apartment buildings managed by his brother's real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barry earned $80,000 in wages, and his wife, Claire, earned $20,000 from a part-time job. Their other income included $5,000 from mutual funds. They had no other income. Barry and his wife file a joint income tax return. How much of the rental loss can Barry and Claire use assuming Barry actively participates in the rental of the apartment buildings.
Answer = $22500
An individual who actively participates in a rental real estate activity may use up to $25,000 of net losses from the rental real estate activity to offset other income.
The $25,000 is reduced by 50% of the amount by which AGI (determined without regard to Social Security, IRA contributions, and passive losses) exceeds $100,000.
Barry has AGI of $105,000 ($80,000 + $20,000 + $5,000).
Accordingly, his allowable $25,000 deduction will be reduced by $2,500 [($105,000 – $100,000) × 50%] and is therefore $22,500
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