Brad owns a small townhouse complex that generates a loss during the year.

Complete each item below regarding (a) the circumstances where Brad can deduct a loss from the rental activity and (b) any limitations that would apply.

a. Brad might be allowed to deduct up to $ ...............of the passive activity losses from the townhouse complex against ................. income. To qualify for the deduction under the real estate rental exception, Brad must actively participate in the activity and own ................... or more of all interests in the activity for the entire taxable year.

Or, Brad may be allowed to deduct the loss if he works more than .............. hours as a material participant in connection with the townhouse complex and more than ................. of the personal services that he renders are performed in real property businesses where he materially participates. If Brad does not satisfy the the requirements for these two exceptions, he must continue to treat income and losses from real estate rental activities as .............. activity income and losses.

b. If Brad, who files single, qualifies for the real estate rental exception, the maximum deduction is reduced if his AGI exceeds the threshold. The reduction is equal to ............ of AGI in excess of $............... The deduction will be phased out completely if AGI reaches $...................

or Brad may be allowed to deduct the loss if he works more than 750 hours as a material participant in connection with the townhouse complex and more than half of personal service.

b. The reduction is equal to 50% of AGI in excess of $100,000. The deduction will be phased out completely if AGI reaches $25,000

Explanation:

Adjusted Gross Income is the final taxable income after all the allowable deductions are adjusted in the income. A tax payer can deduct up to $25,000 for the passive losses. This is standard deduction which Brad can deduct from the income.