🎯Mom & Pop Exception TF

Andy experienced a loss of $20,000 from renting an apartment that he owns. Andy’s Adjusted Gross Income (AGI) before factoring in the rental loss amounts to $76,000. For Andy to claim a deduction for this rental loss under the mom-and-pop exception, he must qualify as a material participant in the rental activity.

Alice experienced a loss of $30,000 from renting an apartment that she owns. Alice’s Adjusted Gross Income (AGI) before factoring in the rental loss amounts to $90,000. Alice will be able to deduct the $30,000 rental loss on her current year’s tax return if she qualifies as an active participant in the rental activity.

Sarah, who owns and actively participates in the operations of an apartment that generated a $25,000 loss during the year, had an Adjusted Gross Income (AGI) of $150,000 from an active business. Sarah will not be able to deduct any of the loss on her income tax return.

Janine, who owns and actively participates in the operations of an apartment complex, incurred a $35,000 loss during the year. Her modified Adjusted Gross Income (AGI) is $130,000 from an active business. Without considering any at-risk amount limitation, Janine is eligible to deduct $10,000 of the loss in the current year.

To be eligible for the passive activity rental real estate exception, the taxpayer needs to meet two criteria: (1) they must have ownership of at least 15 percent of the property, and (2) they must actively participate in the decision-making process related to its management.

Meeting the standard of active participation is considerably more challenging compared to the requirement for material participation.