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CPA24
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Posted: 03 Jan 2011 at 12:27 \| IP Logged

Lane, a single taxpayer received $160,000 in salary, $15,000 in income from an S Corp in which Lane does not materially participate, and a $35,000 passive loss from a rental real estate activity in which Lane materially participated. Lane's modified AGI was $165,000. What amount of the rental real estate activity loss was deductible?

a. $0

b. $15,000

c. $25,000

d. $35,000

b. is the correct answer. I know that real estate rental activity losses can be deductible against non-passive income if the taxpayer actively participated (up to $25,000). So I guess this isn't the case for material participation as well? I just thought that material participation for rental real estate would be sufficient to allow deduction against ordinary income, but I see that is not the case. Any comments?

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DumbButTrying
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Posted: 04 Jan 2011 at 17:04 \| IP Logged

Becker states that a passive activity is any activity in which the taxpayer does not materially participate, with the exception of the mom-and-pop exception you mentioned, but then with the further exception of the phase-out for high-income taxpayers. See Becker chapter 1. I don't know what the phase-out range is but the income figures in that question are pretty darn high so it's a safe bet the mom-and-pop exception just fails. Perhaps that's why the deduction would be limited to offsetting the other passive income, the $15,000 from the S corp.

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CPA24
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Posted: 05 Jan 2011 at 09:28 \| IP Logged

Ok, thanks DumbButTrying!

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fankoosh555555
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Posted: 05 Jan 2011 at 11:04 \| IP Logged

I don't understand why the whole 35,000 is not deductible
Wiley states that if a taxpayer materially participates in
activity then the passive loss limitation does not apply
and he can deduct the whole amount of loss

Search for other posts by fankoosh555555

CPA24
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Posted: 05 Jan 2011 at 17:06 \| IP Logged

I didn't understand that either fankoosh. It was so frustrating b/c just when you think you have understood all the rules, then here this goes. I believe that dumbbutrying was right with the loss limitation as far as the phaseout. I just wish that it was more transparent on our review material so a similar exam question like this will be missed. I would have also chose $35k solely on the fact that material participation is deductible against ordinary income.

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