Definition
Gross income minus specific allowed deductions (adjustments), used to determine tax liability; important for many real estate tax issues like passive activity loss limitations and income-based deductions.
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Adjusted Gross Income (AGI) is a key tax number that limits various deductions and tax credits. From total income (wages, business income, capital gains, interest, dividends), you subtract adjustments like IRA contributions, self-employment tax deductions, and student loan interest, arriving at AGI. Many real estate tax rules reference AGI: up to $25,000 of rental losses can offset other income for landlords who actively participate, and that allowance phases out between $100,000 and $150,000 of modified AGI. Some income-based deductions phase out above certain AGI limits. Property taxes count toward the federal SALT cap, which in 2026 is $40,400 ($20,200 if married filing separately) and shrinks when modified AGI is over $505,000 ($252,500), though not below $10,000 ($5,000). Home office deductions, business expense deductions, and depreciation strategies all connect to AGI calculations. High AGI can trigger additional limitations and create 'phase-outs' of beneficial deductions. Understanding your AGI target is important in tax planning—timing income recognition (or deferring it) to stay below AGI thresholds can save significant tax. Real estate professionals might adjust business structure (LLC, S-corp) to manage AGI implications.
Pro Tip
Monitor AGI throughout the year, especially if you have significant rental losses. Timing capital gains recognition or other income can optimize deductions.
Example
An investor with $30,000 of rental losses and modified AGI of $160,000 can't use the $25,000 allowance at all; the losses carry forward to later years or until the property is sold. At $120,000 of modified AGI, up to $15,000 could be used.