Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

Question

Quizplus · Accepted Answer

Michelle can deduct up to $11,000 of rental property loss. The rental loss is a passive activity loss, but Michelle is actively participating in the rental property, so she can deduct up to $25,000 of rental property losses if her adjusted gross income (AGI) is less than $100,000, which is the case here. The rental loss is used to offset Michelle's other income, starting with her non-passive income, which includes her salary, long-term capital gains, and dividends, before any remaining rental loss can carry over to future years. Therefore, Michelle can deduct $11,000 of the rental loss ($115,000 + $10,000 + $3,000 - $25,000 = $103,000; $15,000 - $103,000 = ($11,000)).

Michelle Is an Active Participant in the Rental Condominium Property