$25,000 Offset Question???

[Carlton Wood]

What’s up BP!!! Have a question about the $25,000 offset I’m hoping someone could answer for me. To be clear I’m referring to the up to $25,000 in passive losses that the IRS allows you to offset your earned income by. 

I was reading up on the $25,000 offset and I’m a bit confused about how it’s calculated. One book I was reading spoke about multiplying your net loss by your effective tax rate and using that number to offset your income. Another book I read says to just take your net loss and use that number to offset your income.

Example 1

You make $10,000 in rental income, you subtract your expenses and depreciation and have a net lose of -$10,000. Assuming you have a W2 income and your effect tax rate is 22% you multiply that by -$10,000(.22X-$10,000) and get -$2,200 and you can offset your income by $2,200. So if you made $82,000 you could lower your taxable income to $79,800.

Example #2

You make $10,000 in rental income and you subtract your expenses and depreciation and have a net loss of. $10,000. You take they negative -$10,000 and offset your income by the whole $10,000. So if you made $82,000 you would lower your taxable income to $72,000

Of course both examples are assuming you made no more than $100,000 and you were involved in your real estate business enough to qualify for the offset.

Which example would be the proper way to calulate the offset?