What is MAGI, Modified Adjusted Gross Income
Real estate losses are subject to a phaseout limit under the material participation exclusion. The phaseout is based on an individuals MAGI, or Modified Adjusted Gross Income.
An individuals MAGI is used as a basis for determining whether they qualify for certain tax deductions.
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.
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).
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||Loss allowance is|
|Up to $100,000||25,000|
|150,000 or more||0|
In 2014, 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 2014. This is determined as follows:
|Less: amount not subject to phaseout||$100,000|
|Amount subject to phaseout||$ 30,000|
|Portion of allowance phased out||$ 15,000|
|Maximum loss allowance (per amounts above)||$ 25,000|
|Less: amount phased out||$ 15,000|
|Deductible rental loss allowance||$ 10,000|
|Passive loss from real estate||$ 37,000|
|Less: passive income from partnership||$ 4,000|
|Passive activity loss||$ 33,000|
|Less: Deductible rental loss allowance (computed above)||$ 10,000|
|Carry over loss to 2015||$ 23,000|
Married Filing Separately – MAGI
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.