A taxpayer has a $50,000 passive loss from a rental activity in Year 1. They have $20,000 of passive income from a limited partnership. They also have $100,000 of wages. What is the AGI impact?

Answer options:

Decrease AGI by $30,000.

Increase AGI by $20,000.

Increase AGI by $0; $30,000 suspended loss.

Decrease AGI by $25,000 (allowance).

How to approach this question

Net all passive items. If positive -> Taxable. If negative -> Suspended (unless exception applies). <br/>$20k - $50k = -$30k. Suspended. Impact on AGI = $0.

Full Answer

C.Increase AGI by $0; $30,000 suspended loss.✓ Correct

IRC §469. Passive losses are netted against passive income. Excess losses are suspended. They cannot offset active income (wages) or portfolio income.

Common mistakes

Deducting the net passive loss against wages.

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