A is corrent. The requirement is to determine the amount of Nichols’ rental real estate loss that can be used as an offset against income from nonpassive sources. Losses from passive sources may generally only be used to offset income from other passive activities. Although a rental activity is defined as a passive activity regardless of the owner’s participation in the operation of the rental property, a special rule permits an individual to offset up to $25,000 of income that is not from passive activities by losses from a rental real estate activity if the individual actively participates in the rental real estate activity. However, this special $25,000 allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000 and is fully phased out when AGI exceeds $150,000. Since Nichols’ AGI is $125,000, the special $25,000 allowance is reduced by $12,500 [($125,000 - $100,000) x 50%]. Thus, $12,500 ($25,000 - $12,500) of the rental loss can be offset against income from nonpassive sources.
B is incorrect because $12,500 of the real estate loss can offset income from nonpassive sources.
C is incorrect because $12,500 of the real estate loss can offset income from nonpassive sources.
D is incorrect because $12,500 of the real estate loss can offset income from nonpassive sources.
|
