Discussion:Rental activity for real eastate professional reported on Schedule C
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> Rental activity for real eastate professional reported on Schedule C
Discussion Forum Index --> Tax Questions --> Rental activity for real eastate professional reported on Schedule C
| 10 June 2008 | |
| I attended a tax conference today and there was a discussion on treatment of residential real estate rentals for a taypayer who qualifies as a real estate professional (broker ) while at the same time is a Schedule C for his real estate sales sole propprietor). The issue was could he report the real estate rental activity which are losses on his Schedule C instead of E because he is a real estate professional and materially participates in the rental activity. The consensus answer was yes but nobody could provide a cite.
This would be helpful to my client because the renatls are losses and would reduce the self employment tax. He is already benefitting from the passive rules on the losses because he is a real estate professional and would continue in the future through use of Schedule C . If this is accurate can I amend previous year returns or would this apply prospectively to new rental properties. The long term solution is a Sub Chapter S but my client is dragging his feet . | |
| 10 June 2008 | |
| All rentals passive by definition. Real estate professionals are exempt from passive loss limitation rules. That doesn't change the rental activities to self-employment income. Most real estate professionals have a business that produces earned income (real estate sales, construction, real estate management, etc.). I suppose that an individual could set up a real estate management company to handle the rentals, but I don't think that would help you in your situation.
At any rate, S Corp is rarely the way to go since S Corps are limited to 25% of their income as passive (assuming there will be income some day). There are worse things in the world than building your social security account. I suggest that there will always be a social security - it's just that we don't know the form it will take someday. | |
| 10 June 2008 | |
| There is no 25% limitation of passive income in an S corp unless the S corp contains accumulated earnings and profits from prior existance as a C corp, in which case it would be subject to the tax on excessive net passive income. A new corporation that elects S status from inception would not be subject to that tax and therefore would not be constrained to the 25% cap on passive income.
That said, I would not advise clients to put RE in an S corp just for the purpose of reducing SE taxes. As Marcilio has suggested, the SE tax saved will one day result in reduced SS benefits. And what is the cost to the savings? The client may one day wish the RE were not in the corp, but getting it out will be a taxable event. Granted, double taxation that a C corp would encounter is avoided, so the poison only makes you sick but is not fatal. | |
| 10 June 2008 | |
| My client has already properly evaluated the impact of reduced social security and it is minimal because he has a full 30 years of SS credits at max each year( age 64 )and plans on actively working 3 or 4 more years . It still sounds like S corp is a viable option. | |
| 10 June 2008 | |
| Putting RE in the corp could be a bigger problem than a little bit of SE tax. | |
| 10 June 2008 | |
| I would say that if he has rental propery that he owns..it goes on SCH E. His real estate business goes on SCH C. Managing rentals for another person is SCH C. taxea | |
| 11 June 2008 | |
| Marcillio, not all rentals are passive. Real estate professionals are not exempt from the passive loss limitation rules. Their rental activities are simply treated as trades or businesses for purposes of Sec. 469.
Cotopop, rental income or lossses, whether or not passive, cannot be taken into account for SE tax purposes unless extraordinary services are provided to the tenant. See Sec. 1402. | |
| 13 June 2008 | |
| 469(c)(2) PASSIVE ACTIVITY INCLUDES ANY RENTAL ACTIVITY. --Except as provided in paragraph (7), the term "passive activity" includes any rental activity.
469(c)(7) SPECIAL RULES FOR TAXPAYERS IN REAL PROPERTY BUSINESS. -- 469(c)(7)(A) IN GENERAL. --If this paragraph applies to any taxpayer for a taxable year -- 469(c)(7)(A)(i) paragraph (2) shall not apply to any rental real estate activity of such taxpayer for such taxable year... I get it. All rentals are passive unless taxpayer is in the real property business. Thanks. | |
Kmikeburns (talk|edits) said: | 13 June 2008 |
| Being "in the real estate business" may not be the same as meeting the IRS definition of Real Estate Professional.
There are certain elections to be made and time and participation requirements to each property unless the election is made to treat all properties as one. There are a couple of prior discussions which you may want to read. | |
