Rental Props As a Business

[geekgirldany]

When does having rental properties turn into a business that is subject to self employment tax?

I understand that a business say renting equipment out to customers is taxed as a business/self employment.

I apologize if this should be so evident to me but I really want to make sure I understand this.

[geekgirldany]

Okay, well I think I have found the answer.

Looks like it is only when the rental property is held for resale, like renting while wanting to flip the prop, or when substantial services is provided to the tenants.

[buzzardbreath]

Self-Rental

Also when the property is rented to a business operation that is owned by the same person.

Essentially prevents the self-employment tax on the business operation to be reduced simply by absorbing part of the income into an equipment rental.

Also applies to rental of personal property as opposed to real property.

[Lion]

Also when the property is rented to a business operation that is owned by the same person.

Essentially prevents the self-employment tax on the business operation to be reduced simply by absorbing part of the income into an equipment rental.

Also applies to rental of personal property as opposed to real property.

And, short term rentals (7 days or less?) are a business and hotel-like rentals with maid service or other substantial services no matter their length. I'm at a biz client's site, but maybe someone can direct you to the code section so you can read it for yourself. Are you asking because of a specific client's situation?

[geekgirldany]

Thank you both for answering. I have a potential client I a meeting with tomorrow. She emailed the question "I am starting a new business this year with rental properties in Georgia and North Carolina, should I Incorporate the business or LLC." I responded with not enough information to answer the question. She ended up making an appointment to meet with me.

You do not really know what people mean when they say "rental props" so I just wanted to make sure I understood about when it would be subject to self employment tax.

[Gary2]

And, short term rentals (7 days or less?) are a business and hotel-like rentals with maid service or other substantial services no matter their length. I'm at a biz client's site, but maybe someone can direct you to the code section so you can read it for yourself. Are you asking because of a specific client's situation?

I've seen some serious debate over that issue, at http://taxqueries.com/questions/4103...ty-be-reported (and I think elsewhere).

The core of the argument is that there's a difference between "That's not a rental for the purposes of determining whether it's a passive activity" and "that's not a rental for the purpose of determining whether it's subject to SE tax (or, if you prefer, for determining whether it's a trade or business)". I don't know whether there are any court cases that would help resolve the issue.

[Lion]

I don't own any rentals and for whatever reason don't currently have any clients with rentals, so wait for some more responders. But to give you something else to think about and to research while you wait, I hear preparers recommend putting rental properties into separate LLCs for liability purposes and to NOT put real estate into corporations due to the tax consequences at sale.

[geekgirldany]

Yes I found the no no on putting rental props into a Corporation. I met with the client today. She said one lawyer told her to put all rentals into one LLC and another said to put each rental into its own LLC. I advised her that I am not a lawyer and can not give legal advice but it seemed to me that each property having it's own LLC would spread out the liability concerns. I also suggested getting an umbrella policy for each property just in case. She was basically wanting to know the tax ramifications.

One thing that was brought up which I have never encountered is should each LLC get a Federal ID number. I am thinking no but unsure. I do several rental props but if any have them in an LLC with an EIN they have not told me. I know I have a couple with an LLC... just never thought about the EIN. Any thoughts?

[MDEA]

Rental props

You do not need an EIN for the LLC since it would be will not file its own return.There are pros and cons of putting real estate into LLC.In MD each LLC costs $300 a year to the state.I recommend that you obtain an umbrella policy unless you are very rich.

[taxea]

Okay, well I think I have found the answer.

Looks like it is only when the rental property is held for resale, like renting while wanting to flip the prop, or when substantial services is provided to the tenants.

it is a business when you are a property/rental manager with a real estate license. If you own the property and manage it without an RE license it is Sch E. If own and also are RE licensed then you could be self-employed (if the law in your state allows it) for the purpose of renting/managing your owned rentals.