Question

Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $(40,000) of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?

Answer 1

$15,000

Step-by-step explanation:

For the purpose of loss relieve , allowance for losses made is considered in calculating the income tax for a period.

The maximum allowance for rental real estate activities on income tax returns for a year is $25,000 for modified annual gross income of not more than $100,000. However , for modified annual gross income within the range of $100,000 + 150,000, the allowance is limited to 50% of the difference between 150,000 and the Modified annual gross income , while a modified annual gross income of %150,000 and above attracts no special allowance.

Workings

For AGI as stated in the question , the allowance is $25,000

But if the income is a modified annual gross income ,Smith is only entitled to 150,000 - 100,000 * 50% = $15,000