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 $ <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.

Required:

1. Compute Frank & Irmas 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?
3. What is their adjusted gross income after considering the Passive Activity Loss rules?