When rental income is considered non-passive.

[DebitThatCreditThis]

I picked up a new client with 5 pass-through entities.

4 of the PTEs are rentals. 1 is a contracting biz.

The former accountant had all of them as non-passive.

While the client is heavily involved in the rentals (he is the property manager, collects rents, etc) I'm not sure about this one.

Further, I'm not seeing any S/E tax on the rental K1's.

My questions around this:

- If they are truly non-passive, would the income be subject to S/E tax?

- Hard to tell from the PY return which option he chose for the K1 classification (Nonpassive or materially participating real estate professional) - any way to tell?

[terryats]

Rental income for a real estate professional is considered non passive unless he is providing services to the rental (such as a motel or short term rentals). He is not subject to SE tax unless he is providing services.
Here is a link from the tax advisor that has some good info. https://www.thetaxadviser.com/issues...-july2014.html

[DebitThatCreditThis]

Rental income for a real estate professional is considered non passive unless he is providing services to the rental (such as a motel or short term rentals). He is not subject to SE tax unless he is providing services.
Here is a link from the tax advisor that has some good info. https://www.thetaxadviser.com/issues...-july2014.html

This is great, thank you!

[Rapid Robert]

That TaxAdviser article is over 8 years old. You might also want to consult IRS Pub 925.

One simple explanation for the non-passive treatment might involve the average period of customer use being 7 or 30 days or less. The instructions for Form 8582 tell you what to do in that case.

It is a common myth among tax professionals that the passive loss rules and the Self-Employment rules are intertwined, they are not. In particular, many think the the average-period-of-use exception automatically means an activity is subject to SE since it is not a rental activity for passive loss rules. They are two separate determinations.