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Real Estate Losses are subject to
a Phaseout limit
under the Material Participation Exclusion.
The
Phaseout is based on your MAGI, or Modified
Adjusted
Gross Income!
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Rental Real Estate
Loss Allowance of up to $25,000
If you or your spouse actively participated in a passive rental activity,
you can deduct up to $25,000 of loss from the activity from your regular
nonpassive income such as wages. The allowance is phased out if
your modified adjusted gross income (MAGI) is between $100,000 and
$150,000.
This special allowance is an exception to the
general rule disallowing
loses in excess of income from passive
activities.
Phaseout of
the Allowance
The maximum loss allowance of $25,000
($12,500 if married filing
separately and living apart for the entire
year) is reduced by 50 cents
for every dollar of modified adjusted gross
income (MAGI) over
$100,000 (or $50,000 if married filing separately).
Modified Adjusted
Gross Income (MAGI)
Modified Adjusted Gross Income is determined without taking into
account the following:
- Taxable social security
benefits or equivalent tier 1 railroad
retirement benefits.
- Deductible contributions to an
IRA or certain other qualified
retirement plans.
- The exclusion allowed for
qualified U.S. savings bonds
interest used to pay higher educational expenses.
- The exclusion allowed for
employer-provided adoption
benefits.
- Any passive activity income or
loss.
- Any passive income or loss for
real estate professionals.
- Any overall loss from a
publicly traded partnership.
- The deduction for one-half of
self-employment tax.
- The deduction allowed for
interest on student loans.
- The deduction for qualified
tuition and related expenses.
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The rental losses allowance is phased
out when your modified
adjusted gross income is over $100,000. For every dollar of
income over $100,000, the allowance is reduced by 50 cents. The
table below breaks down the phase out in $10,000 increments:
MAGI
is
Up to $100,000
$
110,000
120,000
130,000
140,000
150,000 or more |
Loss
allowance is
25,000
20,000
15,000
10,000
5,000
0 |
Example: In 2011, Jennifer Whistler
had a salary of $130,000,
$4000
of income from a limited partnership, and a $37,000 loss from
a
rental building in which she actively participates. Jennifer may
deduct only $10,000 of the rental loss. $4,000 of the loss offsets her
income from the partnership. The remaining $23,000 must be
carried over to 2012. This is determined as follows:
MAGI
$
Less: amount not subject to
phaseout
Amount subject to phaseout $
Phase-out percentage
Portion of allowance phased out
Maximum loss allowance
$
Less: amount phased out
Deductible rental loss
allowance
$
Passive loss from real estate $
Less: passive income from
partnership
Passive activity loss
$
Less: Deductible rental loss
allowance
Carry over loss to 2012
$ |
130,000
100,000
-----------
30,000
50%
-----------
15,000
25,000
15,000
-----------
10,000
37,000
4,000
-----------
33,000
10,000
-----------
23,000 |
Married Filing Separately
As noted above, if you are married and file separately,
the phaseout
allowance of $25,000 is split to $12,500.
Exceptions To The Phaseout Rules
A higher phaseout range applies to
low-income housing credits
for property placed in service before 1990 and rehabilitation
investment credits from rental real estate activities. For those
credits, the phaseout of the $25,000 special allowance starts when
your modified adjusted gross income exceeds $200,000 ( $100,000
if you are a married individual filing a separate return and living apart
at all times during the year).
There is no phaseout of the $25,000 special allowance for low-income
credits for property placed in service after 1989 or for the commercial
revitalization deduction.
Click here to leave modified adjusted
gross income and
return to material participation main
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