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Tax treatment of “rent”
A USA tax question:
Getting the numbers ready for my taxes, I ran across this statement: If you’re in the business of renting out “real property,” i.e. real estate, you don’t have to include rental income in your “self-employment income.” This would reduce your self-employment tax significantly.
I was just wondering whether rental income derived from production equipment would qualify for the same exclusion. Does anybody know? Or is this just another case of how the tax code is biased toward the lobbyist-heavy real estate industry?
Bob C
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3 Replies
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The separation of “passive/investment income” from “business income” means that you cannot offset passive losses against business income and vice versa. It normally works against the interests of real estate investors.
Income from the rental of personal property is always treated as regular business income – except in cases where it a “disguised purchase” i.e where the renter is given the option to purchase the property at a greatly reduced price at the end of the lease term.
FYI – you don’t pay SE tax on salary over $100K(94200?) so the idea that real estate moguls benefit from this provision is kind of quaint.
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[Peter Ralph] “Income from the rental of personal property is always treated as regular business income”
Thanks. That clears it up.
re: paying SE tax “only” on the first 100k. I was aware of the cut-off, but I’m not quite clear how that relates; if a “mogul” earns 100% of his/her income from rent, he/she would pay zero SE tax, right? I’m still mystified as to the justification for a landlord — especially a mogul — potentially paying no SE tax.
I guess you’re simply saying that to a mogul, 15K is trivial. True that….
Thanks again for the info.
No mogul,
Bob CMacPro 2 x 3GHz dualcore; 10 GB 667MHz
Kona LHe
Sony HDV Z1
Sony HDV M25U
HD-Connect MI
Betacam UVW1800
DVCPro AJ-D650 -
Bob – it’s a tax on income from employment, not investments. The majority of the income for real estate investors is capital gain not rental income & is not liable to income tax either – they pay capital gains at a much lower rate (15%), and can rollover gains until they die to avoid paying tax at all.
The justification is Manifest Destiny.
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