During the current year, Pablo, a nurse who is single, has $95,000 of salary, $30,000 of...

During the current year, Pablo, a nurse who is single, has $95,000 of salary, $30,000 of income from dividends, and a $27,000 loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $110,000. Of the $27,000 loss, how much is deductible in the current year?

a.    $20,000
b.    $22,500
c.    $24,500
d.    $25,000
e.    $27,000

Expert Solution

The correct answer for the question is Option A - $20,000. Per IRS, every taxpayer who actively participates in rental real estate activity is eligible for a deduction of upto $25,000 for AGI less than $100,000. For AGI greater than $100,000, this deduction is phased out. For AGI greater than $150,000, the deduction is completely phased out. Hence, for the AGI between $100,000 and $150,000, the deduction is phased out as follows:

$25,000 * $10,000 / $50,000 = $5,000 is phased out. Hence , out of the total allowed deduction of $25,000 , we can reduce $5,000. As such, the correct answer is $25,000 - $5,000 = $20,000

Option B & Option C are per the above calculations.

Option D is incorrect as $25,000 is incorrect as $25,000 is the total deduction allowed but since Pablo's AGI is greater than $100,000.

Option E is incorrect as $27,000 is not an incorrect amount as the maximum allowd amount is $25,000 only.

Please let me know if you have any questions via comments and all the best :) !

ekkarill92 answered 2 years ago

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