Is real estate professional rental income subject to SE tax?

[David]

New client has several K-1s from rental activites. A few of the K-1 rental income amounts are subject to the SE tax on his 2015 tax return. Others aren't. The K-1s listed as real estate professional aren't subject to the SE tax. The properties listed as not passive are subject to the SE tax. The client is a real estate professional and I'm not sure why some K-1 income is subject to SE tax and others aren't.

Aren't real estate professionals subject to the SE tax? I thought that was one of the draw backs to electing real estate professional.

Thanks for your help.

[RitaB]

My first thought is he's a limited partner in some entities.  My second thought is there are a lot of crappy preparers, and maybe the K-1s are incorrect.

[jklcpa]

Unless the taxpayer elects to treat all properties as one entity, then the determination of being a real estate professional must be determined on each property individually.

Real estate professionals are not subject to SE tax, and also not subject to the net investment income tax.

Maybe this article from The Tax Advisor will help: http://www.thetaxadviser.com/issues/2014/jul/skarbnik-july2014.html

[David]

Thanks Rita and Judy,

The K-1 for the one amount that was subjected to the SE tax indicated that he is a general partner or LLC manager. This is probably why the CPA subjected it to SE tax on the 2015 tax return.

My program isn't subjecting it to SE tax, even with the LLC manager box marked. So that is correct since he is a real estate professional?

Thanks for your help.

[RitaB]

I really don't know what I'm talking about here.  I was just having thoughts, so don't listen to me. 

[jklcpa]

2 minutes ago, David said:

Thanks Rita and Judy,

The K-1 for the one amount that was subjected to the SE tax indicated that he is a general partner or LLC manager. This is probably why the CPA subjected it to SE tax on the 2015 tax return.

My program isn't subjecting it to SE tax, even with the LLC manager box marked. So that is correct since he is a real estate professional?

Thanks for your help.

Paragraph 10 of the article, or

IRC sec 1402(a)(1) "... there shall be excluded [from self-employment income] rentals from real estate and from personal property leased with the real estate ... together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer ...."

[David]

Thanks so much for your help Judy. I just wanted to make sure I was handling this correctly since nothing I did would subject it to SE tax like the 2015 tax return did.

[Gail in Virginia]

2 hours ago, RitaB said:

I really don't know what I'm talking about here.  I was just having thoughts, so don't listen to me. 

Rita, I am so glad someone is still able to have thoughts....

 

[RitaB]

Just now, Gail in Virginia said:

Rita, I am so glad someone is still able to have thoughts....

 

Well, they may or may not be useful but they are rolling around in there.  The voices in my head come up with some stuff ISTG.

[Catherine]

36 minutes ago, RitaB said:

Well, they may or may not be useful but they are rolling around in there.  The voices in my head come up with some stuff ISTG.

@RitaB, just to go on record - we love you SO much!

[RitaB]

I love you all, too! 

[Richcpaman]

David:

If your client is a general Partner in a partnership, then he/she may be subject to S/E tax because of that, and nothing to do with whether he is a RE Pro or not.

Rich

[David]

Rich,

Even though the only income is rental real estate income on line 2 of the K-1?

[RitaB]

16 hours ago, Richcpaman said:

David:

If your client is a general Partner in a partnership, then he/she may be subject to S/E tax because of that, and nothing to do with whether he is a RE Pro or not.

Rich

So you're telling me my answer had a chance...

[BHoffman]

https://www.irs.gov/individuals/tax-trails-self-employment-income-6

Your client could be subject to SE tax for rents reported on one K1 but not the others.  

[jklcpa]

David, as I said before, you have to go property-by-property unless the taxpayer elects to treat all of his r.e. holdings as one. The taxpayer has to meet rules for r.e. professional designation for each property, or each partnership. You can read about that here on the IRS page for partners, starting at the heading Passive Activity Limitation. Please go to the IRS page and read it, not just my little snippet below, but under that heading for PAL and under #2 it says:

Quote

Passive activities do not include the following.

1. Trade or business activities in which you materially participated.

2. Rental real estate activities in which you materially participated if you were a real estate professional for the tax year. You were a real estate professional only if you met both of the following conditions.

   1. More than half of the personal services you performed in trades or businesses were performed in real property trades or businesses in which you materially participated.

   2. You performed more than 750 hours of services in real property trades or businesses in which you materially participated.

Obviously, the above is not conclusive. You have to determine whether or not your client meets the r.e. professional rules for each of the partnerships.  

You might also be interested in this court case a few years ago that addressed this issue for an LLC member.  In Chambers v. Comm'r, T.C. Summ. Op. 2012-91, the Court held that the taxpayer could count the hours he spent on the LLC in his total real estate professional hours and that he should be viewed as a general partner because under his state's law (TN) LLC members may participate in management of the LLC, and because he was required to participate in management under the the LLC's articles of organization and did so. Because Chambers established that he materially participated in the LLC, he could count the hours spent working on it for purposes of the real estate professional test.