Travis is a 30% owner of 3 rental houses. He spends 625 hours a year managing the properties. In addition, he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year. The rental units generate a total loss of $22,000, and Travis' adjusted gross income in the current year, before considering the rental properties, is $120,000. How much of the loss can Travis deduct?

Question

Quizplus · Accepted Answer

Travis is a passive investor in the rental properties as he does not actively participate in managing it. Therefore, his loss (or deduction) from the rental properties is limited to his total investment in the rental properties (30% ownership in 3 houses = 0.3 x 3 = 0.9).
Total loss incurred from rental properties = $22,000
Travis' share of the loss = 0.9 x $22,000 = $19,800
However, his deduction is limited to his taxable income from all sources before considering the rental properties. His adjusted gross income before considering the rental properties is $120,000.
Therefore, his allowable loss deduction will be the lesser of his share of loss from the rental properties ($19,800) or $25,000 (the maximum loss allowed for taxpayers with adjusted gross income of $100,000 or more).
Hence, Travis can deduct $6,600 (the lesser of $19,800 and $25,000). Therefore, the correct answer is (C) $6,600.

Travis Is a 30% Owner of 3 Rental Houses