Question

In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner. If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss.

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Answer 1

Kelly, an active participant in a rental real estate activity with a $35,000 loss and a modified AGI of $100,000, is allowed to deduct $25,000 of the loss according to IRS rules.

Step-by-step explanation:

The question pertains to the rules surrounding the deduction of losses from rental real estate activities on personal income tax returns, and how participation and income levels affect these deductions.

For someone like Kelly who is an active participant in a rental activity and has a modified adjusted gross income (AGI) of $100,000, the IRS allows a special loss deduction of up to $25,000 against ordinary income.

Given that she has a $35,000 loss, she can only deduct $25,000 of this loss under these passive activity loss rules, as her AGI does not exceed the phase-out limit.

These tax rules highlight the importance of understanding both explicit costs and implicit costs when considering the profitability and tax implications of business decisions.