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 isLoss allowance is
Up to $100,000 25,000
110,000 20,000
150,000 or more0

MAGI Example

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
Phaseout Percentage50%
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.