1. The income and expense from the rental condominium must be reported on Schedule E. Depreciation on the property should be calculated as follows: Depreciable basis of condo 5150,000 MACRS percentage from Exhibit 9.6, text p. 9-12 x 3.636% 2010 depreciation allowed S 5,455 When the depreciation is added to the other 521,775 of expenses from this rental property, the Wilsons have a 510,830 loss. The loss is considered a passive loss and reported on Form 8582. Even though rental losses are by definition passive losses, the Wilsons are allowed to deduct the entire loss under the rental real estate exception of Code 4690). Their modified AGI is 5119,168 (AGI S103,S66 + rental loss 510,830 + self-employment tax deduction *772) which exceeds the 5100, 000 threshold by S19,168 and 50 percent of this excess is $9,584. Thus the allowable amount 515,416 (S2S,000 - 59,584) exceeds the loss of 510,830.