Paul owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year.He has AGI of $150,000 from an active business.He may not deduct any of the loss.

Question

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As a high-income earner, Paul is subject to the passive activity loss rules, which limits the amount of passive losses that can be deducted against active income. In this case, the loss from the apartment building is considered a passive activity, as Paul actively participates in its operations but does not materially participate. As a result, he may not deduct any of the $40,000 loss against his active business income of $150,000.

Paul Owns and Actively Participates in the Operations of an Apartment