🎥# 1 TCP Video Simulation

Responses

1. 

   SONNY SINGH 16 October 2024

   Lesson 13, #1 simulation has a question for active participant :
   Q – I thought you can deduct the entire amount of an income loss under an Active Participant but professor Farhat said you can only deduct $20,000 from the $35,000 income loss in year 2 for Burke? i don’t understand it.
   THanks,
   sonny

   1. 

      Maroun, CPA 18 October 2024

      Hello Sonny,

      Where did you learn that you can deduct the entire amount of an income loss under an Active Participant?
      As an active participant in rental real estate, a taxpayer can deduct up to $25,000 of rental real estate losses against non-passive income, such as wages, under the special $25,000 allowance provided by the IRS (Section 469). However, this deduction is subject to phase-out limits based on the taxpayer’s modified adjusted gross income (MAGI).
      The $25,000 special allowance for active participants begins to phase out when the taxpayer’s MAGI exceeds $100,000. For every $2 above $100,000 of MAGI, the allowance is reduced by $1.
      Burke’s excess MAGI = 110,000 − 100,000 = $10,000
      Phase-Out Reduction = 10,000 ÷ 2 = $5,000

      This means the $25,000 allowance is reduced by $5,000.
      Remaining Allowance = 25,000 − 5,000 = $20,000

      This is why the simulation showed only $20,000 as deductible in Year 2.
      Let me know if further clarification is needed!

2. 

   SONNY SINGH 19 October 2024

   Please confirm the following:
   AT Risk Limitation:
   +Cash Investment
   + Property
   + Recourse Liability
   + /- taxpayer’s income/loss
   – withdrawls

   What is AT Risk in measuring loss Limitation means?

   1. 

      Maroun, CPA 22 October 2024

      Hello Sonny,

      The at-risk limitation is a tax rule designed to limit the amount of losses a taxpayer can deduct from a business or investment activity. Specifically, the taxpayer can only deduct losses up to the amount they have at risk in the activity. The goal of this rule is to prevent taxpayers from deducting losses beyond what they have actually invested or are personally liable for.

      If the loss for the year exceeds the amount the taxpayer has at risk, the excess loss is carried forward to future years until the at-risk amount increases (through additional contributions, income, or paying off liabilities).

      Please watch the following video for additional information:
      https://farhatlectures.com/courses/individual-income-tax-course-tax-i/lessons/investor-losses-passive-activity-material-participation-at-risk-limit/topic/pal-at-risk-limitation/

      Let me know if this helps clarify things or if you need further explanation.

3. 

   Deleted User 27 April 2026

   Gleim – 1 TCP Video Simulation I think Link At Risk Amount Is 60000 Plus 5000 Passive Income Less 50000 Passive Loss= 15000 and Not 10000.

   1. 

      Maroun, CPA 29 April 2026

      Hello Devang,

      The $5,000 passive income does not increase Link’s at-risk amount. It matters only for the passive activity loss limitation, not for the at-risk calculation. Also, the IRS says you apply the at-risk rules before the passive activity rules.

      So for Link:

      Amount at risk before Year 2 loss = $60,000 cash investment
      The $40,000 nonrecourse debt is not included in amount at risk here. Nonrecourse debt counts only in limited situations such as qualified nonrecourse financing secured by real property, which this cattle-breeding limited partnership is not.
      Year 2 activity loss = $50,000

      Therefore:
      Amount at risk at December 31, Year 2 = $60,000 − $50,000 = $10,000

      The $5,000 passive income from other sources is used only in the next step to determine how much of the $50,000 passive loss is currently deductible under the PAL rules. That is why it affects the suspended passive loss, not the at-risk amount.

      Hope this helps!