Generally real estate activities are categorized as passive activities. Passive loss has the disadvantage that passive loss can only offset passive income. There are a couple exceptions to this rule regarding residential real estate activities. We will discuss the $25,000 small landlord exception. This is a benefit to medium income taxpayers.
To qualify for the small landlord exception, the taxpayer must meet two tests as follows:
1. Own at least 10 percent interest in residential real estate.
2. Actively participate in real estate activity.
Note, the $25,000 deduction begins to phase out at modified adjusted income greater than $100,000 and is completely phased out at adjusted gross income greater that $150,000.
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