Question

anwer owns a rental home and is involved in maintaining it and approving renters. during the year, he has a net loss of $17,300 from renting the home. his other sources of income during the year are a salary of $120,000 and $12,700 of long-term capital gains. how much of anwer's $17,300 rental loss can he deduct currently if he has no sources of passive income?

Answer 1

Anwer may be unable to currently deduct his full $17,300 net rental loss due to passive activity loss rules, as his salary and long-term capital gains are non-passive forms of income.

Step-by-step explanation:

The correct answer is option (d), which suggests that Anwer may be limited in deducting his full net rental loss against other types of income. Under the IRS rules for passive activity losses, rental activity is generally considered passive unless the individual is a real estate professional.

If rental activities are classified as passive, the losses from those activities can usually only be deducted against passive income, not active income like wages or salary.

Anwer's salary and long-term capital gains are considered non-passive income. Without any passive income sources to offset the rental loss, he would be subject to the passive activity loss rules.

In 2023, these rules allow for a $25,000 special allowance for rental real estate losses for individuals with adjusted gross incomes (AGI) of $100,000 or less, which phases out by $1 for every $2 of AGI over $100,000.

This means that Anwer, with an AGI above this limit because of his $120,000 salary, would not be able to currently deduct the $17,300 rental loss against his other income.

It's important to note that unallowed losses could be carried forward to offset passive income in future years.

These rules are complex and can vary based on an individual's specific circumstances, and tax laws are subject to change, so it is always recommended to consult with a qualified tax professional for personalized advice.