Question

If a taxpayer has the following for the current year:

	Active	Portfolio	Passive
	Income	Income	Income
Income	$75,000	$22,000	$55,000
Deductions	(45,000)	(16,000)	(110,000)
Income(Loss)	$30,000	$6,000	$(55,000)

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I.	If the taxpayer is a regular corporation, taxable income from the three activities is a loss of $19,000.
II.	If the taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active participant, taxable income is $11,000.

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	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

According to the test bank 2016, the answer is (c). I understand the first one is correct, but don't understand why the second one is correct as well. Please explain. Thank you

Answer 1

The taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active participant:

• As per IRC Section 469, the taxpayer can deduct up to $25,000 of loss from the rental activity against non-passive income in any taxable year the taxpayer is actively participating in the rental real estate activity.

Please refer below the calculation of taxable income:

Sr No	Particulars	Amount ($)
a.	Active Income	30,000
b.	Portfolio Income	6,000
c.	Passive Income (Loss)	-25,000
(a+b+c)	Taxable Income	11,000

Based on the above, the taxpayer can deduct up to $25,000 of loss from the rental activity against non-passive income hence the taxable income is $ 11,000. Therefore, statement II is also correct.