Barry is a lawyer. He owns 10 apartment buildings that are managed by his brother’s real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barry earned $80,000 in wages. His wife, Claire, earned $20,000 from her part-time job. Their other income included $5,000 in dividends from their mutual funds. They had no other income. How much of the rental loss can Barry use assuming Barry actively participates in the apartment buildings?

Note, the applicable tax law in this case states permits an individual who engages in a rental real estate to use up to $25,000 of net losses from the rental real estate activity to offset other their other income.

Since a rental activity is classified as a passive activity, whether or not the taxpayer participates in such activity, the $25,000 rental loss is reduced by 50% of the amount in the case where Annual Gross Income (AGI) exceeds $100,000. Consequently, since Barry's AGI is $105,000 ($80,000 + $20,000 + $5,000), which is greater than $100,000, only the amount exceed $100,000 would be reduced by 50%, which is calculated below:

$105,000 – $100,000 × 50% = $2,500, next subtract amount from Barry's $25,000 ($25000-$2,500) = $22,500.