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 in rental losses. The $15,000 rental loss is a passive loss, meaning it can only be offset by passive income. However, Michelle does not have any passive income. Therefore, the rental loss is suspended and carried forward to future years. In the current year, Michelle's total income is $115,000+$10,000+$3,000=$128,000. Since she does not have any other deductions or exemptions, her taxable income is $128,000. However, she can deduct up to $25,000 of rental losses if she actively participates in the rental property. Since her loss is only $15,000, she can deduct the entire amount. Therefore, her taxable income is now $128,000-$11,000=$117,000.

Michelle Is an Active Participant in the Rental Condominium Property