Apply specialized rules for farmers (Schedule F, income averaging) and rental real estate, including the passive activity loss limitation and the active-participation exception.

Harriet Bellwether, a single individual, owns one residential rental property that she actively participates in by approving tenants and arranging repairs, but she is not a real estate professional. For 2024 the rental produces a 22,000 dollar loss and she has no other passive activities. Her modified adjusted gross income before any rental loss is 130,000 dollars, and she has no prior-year suspended passive losses. Applying the active-participation special allowance, how much of the 22,000 dollar loss may she deduct against her non-passive income for 2024?

• A22,000 dollars, because an individual who actively participates in a rental may deduct the entire rental loss against other income once participation is established, regardless of the level of modified adjusted gross income.
• B12,500 dollars, because the 25,000 dollar allowance is simply halved for a single filer with modified adjusted gross income above 100,000 dollars, giving a flat 12,500 dollar deduction for the year.
• C10,000 dollars, because the 25,000 dollar special allowance is reduced by 50 per cent of the amount by which modified adjusted gross income exceeds 100,000 dollars, leaving 10,000 dollars available and suspending the remaining 12,000 dollars.check_circle Correct
• D0 dollars, because modified adjusted gross income above 100,000 dollars eliminates the special allowance entirely and the whole 22,000 dollar loss is suspended until the property is sold.

Why A is wrong: It is tempting to treat active participation as removing all limits, but the special allowance is capped at 25,000 dollars and is reduced as modified adjusted gross income rises, so the full 22,000 dollars is not automatically allowed.

Why B is wrong: Halving the allowance to a flat 12,500 dollars misreads the phase-out; the reduction is 50 per cent of the excess over 100,000 dollars, not a flat halving of the allowance, so 12,500 dollars is wrong.

Why C is correct: The 25,000 dollar allowance is cut by half of the 30,000 dollar excess over 100,000 dollars, that is 15,000 dollars, leaving a 10,000 dollar allowance that caps the loss; the other 12,000 dollars is suspended and carried forward.

Why D is wrong: The allowance does not vanish at 100,000 dollars; it phases out gradually and is gone only at 150,000 dollars, so at 130,000 dollars some allowance remains and deducting nothing understates the deduction.