Partnership rental income subject to Net Investment Income?

[nwtaxlady]

My client is the president/manager/head honcho of a corporation. The corporation leases the commercial building. My client is also a partner in this commercial building and receives a K-1 for the rental income of say $45,000 for his share. So my client is physically there in this building just about 6 days a week. I asked my client who makes the property management decisions and he said he does. So if something needs to be replaced or repaired he makes all the decisions. He said the other partners are silent partners.

So my question is, is this $45,000 rental income that comes from his Partnership K-1 subject to the Net Investment Tax?

Thanks!

[Roland Slugg]

... is this $45,000 rental income that comes from his Partnership K-1 subject to the Net Investment Tax?

Yes, it is. Report it on F-8960, line 4a.

You may be wondering of the rental income can be backed out on line 4b of F-8960. It can not. Generally, the amounts that can be backed out on that line are amounts included on line 4a that are subject to S-E tax. Your client's $45k of rental income is not subject to S-E tax (unless he is treating it as a trade or business). Therefore, it is subject to the NIIT.

[kathyc2]

So my question is, is this $45,000 rental income that comes from his Partnership K-1 subject to the Net Investment Tax?

Thanks!

Sounds like it should be NIT exempt under 1.469-2f6.

[nwtaxlady]

more help please, anyone!!

Sounds like it should be NIT exempt under 1.469-2f6.

That is what I was thinking.... Does anyone have any experience with this? I am sure I am not the only one with a client in this situation.

I am confused. Isn't rental income passive income? So say our normal clients that have rentals and they are making decisions on replacing the heater, or carpet etc. Then their rental income is subject to the Net Investment Tax right??? So in my clients case how is it different? Or do I have it all wrong?

That's why I ask.

[kathyc2]

Special carve out for separate owning of building from the S corp, often done for liability protection. If the S owned the building used in it's operation you would not expect NIT. If instead of the S owning building, a shareholder owns it either personally of through a separate LLC, S, etc. they are also exempt from NIT.

From TaxAdvisor:

"Self-rental income: Self-rental income arises when a shareholder rents property to an S corporation. The property is typically owned directly by the S corporation shareholder or held inside a separate entity owned by the shareholder. Under Sec. 469, rental income is almost always considered passive income. However, to prevent taxpayers from using a self-rental arrangement to generate passive income to offset unrelated passive losses, Regs. Sec. 1.469-2(f)(6) recharacterizes as nonpassive the rental income earned from a business in which the taxpayer materially participates. The proposed regulations under Sec. 1411 did not specifically address whether self-rental income subject to recharacterization under Sec. 469 would be treated as net investment income for purposes of Sec. 1411. The final regulations address this issue, explicitly stating that (1) income from self-rental activities is treated as derived in the ordinary course of business, and (2) the characterization of such income as nonpassive due to Regs. Sec. 1.469-2(f)(6) also applies for purposes of Sec. 1411. Consequently, self-rental income is not included in net investment income. In addition, the regulations provide that any gain or loss from the sale of the assets generating the rental income is treated as nonpassive and not subject to the additional tax."

Full article:

http://www.thetaxadviser.com/issues/2014/apr/clinic-story-10.html