Question

Carlos is a 25 percent owner of CEBJ Builders, a company that specializes in residential construction. The other 75 percent of CEBJ is owned by his three brothers. During the year, Carlos spends 1,800 hours managing the operations of CEBJ. He also is the 100 percent owner of four rental properties and spends 125 hours a year maintaining the properties, more than any other individual. During the current year, the four properties generate a loss of $18,500. His adjusted gross income before considering the rental loss is $118,000. What amount of the loss can Carlos deduct in the current year? Assume that Carlos’s ownership interest in CEBJ is 4 percent. What amount of the loss can he deduct? Assume that Carlos spends only 600 hours managing CEBJ Builders and 1,200 hours managing a microbrewery he acquired earlier in the year. What amount of the loss can he deduct? Assume that Carlos hires his brother-in-law to help him manage the properties. Carlos spends 125 hours and his brother-in-law spends 225 hours managing the rental properties. What amount of the loss can Carlos deduct?

Answer 1

a) What amount of the loss can Carlos deduct in the current year?

Carlos's passive losses = $18,500 (rental activities are always passive unless you are a real estate professional)

An individual can deduct up to $25,000 per year in passive losses, but that deduction starts to phase out above an AGI of $100,000. For every $2 above $100,000, the deduction phases out by $1.

Total phase out = ($118,000 - $100,000) x 1/2 = $9,000

Carlos can deduct up to $18,500 - $9,000 = $9,500 from his gross income.

b) Assume that Carlos spends only 600 hours managing CEBJ Builders and 1,200 hours managing a microbrewery he acquired earlier in the year. What amount of the loss can he deduct?

Same as above, since both managing CEBJ and the microbrewery are considered material participation (more than 500 hours), while renting represents a passive activity.

c) Assume that Carlos hires his brother-in-law to help him manage the properties. Carlos spends 125 hours and his brother-in-law spends 225 hours managing the rental properties. What amount of the loss can Carlos deduct?

renting properties is always a passive activity, and income or losses are considered passive income or losses