Question

Pablo, who is single, has $85,000 of salary, $15,000 of income from a limited partnership, and a $32,000 passive activity loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $85,000. Of the $32,000 loss, how much is deductible?

Answer 1

Of the $32,000 passive activity loss from the real estate rental activity, $0 is deductible.

The reason for this is that passive activity losses can only be offset against passive activity income. In this case, Pablo has a passive activity loss of $32,000, but his only income from a limited partnership is $15,000, which is not enough to fully offset the loss. Since his modified adjusted gross income is $85,000, he does not have enough passive activity income to deduct the passive activity loss.

Therefore, none of the $32,000 loss is deductible in this scenario. It is important to note that passive activity losses can sometimes be carried forward to future years to be offset against future passive activity income.