Frank and Irma purchased the 20-unit apartment building for $4,500,000 (i

Frank and Irma purchased the 20-unit apartment building for $4,500,000 (i.e., $500,000 for the
land and $4,000,000 for the building). The income and expenses from the apartment building are
as follows:
Income (i.e., 20 units @ $1,500/month) $ 360,000
Expenses:
Depreciation ($4 million @ 2.56%) $ 102,000
Insurance 50,000
Interest Expense ($2 million @ 3%) 60,000
R&M 10,000
Real Estate Taxes 67,500
Utilities 75,000
Manager 12,000
Total <376,500>
Net Income <Loss> $ _<16,500>
The apartment manager collects the rents each month, inspects the property on a regular basis
and handles tenant complaints. The apartment manager talks to Frank and Irma regarding the
tenant complaints and discusses the potential repairs and maintenance that is required. The
manager then arranges for the services contracts with outside vendors. Frank & Irma make the
monthly deposits of tenant rent checks at their local bank and pay for all apartment expenditures
from an apartment checking account that they control.

1. Compute Frank & Irma’s modified adjusted gross income.

2. Under the Passive Activity Loss rules, how much of this loss can Frank & Irma claim on their Federal Income Tax return?