Originally Posted by BJY1
This question is based on the following assumptions:
#1. Rental real estate income is not subject to Self Employment taxes
#2. Real Estate investors are subject to the new 3.8% Medicare tax
#3. Non Passive income is exempt from the 3.8% tax.
#4;Thus, assuming an investor can pass the test of being a full time real estate professional (hours worked and documented) and thus be exempt from the 3.8%, do they then have to pay SE tax?
#5;Also assume the investor owns the property through an LLC.
#6;In other words, under these conditions can an investor avoid both taxes?
#1; it depends. you're renting out real estate to make money, you may have to pay self-employment tax on your rental income; Rental income is subject to income tax. Rental income only generates self-employment tax, however, if you "materially participate" in the renta/ a r/e professional/ a dealer. If you don't do anything for your tenants but basic services ,i.e., trash pickup and keeping the common areas of the property clean, for example , it's a passive investment; if you provide maid service, an onsite laundry or a recreation area, you're providing material participation and you owe self-employment tax.you need o file Sch C/ SE raher than Sch E of 1040. If you're materially participating in the rental r/e pro or a dealer,, you'll need to report your profit or loss on Sch C, and calculate your self-employment tax on Sch SE aslong as the amoun ton Sch SE line 2 / 3 is $400 or exceeds $400. If you're claiming depreciation or a loss, you'll have other paperwork as well. If you do pay self-employment tax on your rental income, don't forget that you can claim half the tax on your 1040 as a deduction. If he is purchasing properties often enough to be considered a dealer, the costs mentioned will be capitalizable as inventory. If less frequent, they will be capitalizable as part of his investment in the properties which would be reported on Sch D.
#2;it also depends; effective in 2013, the Health Care and Education Reconciliation Act will subject some individuals to a 3.8% Medicare contribution tax on unearned income. This new tax will apply to single taxpayers with a MAGI in excess of $200K and married taxpayers with a MAGI in excess of $250K if filing a joint return, or $125K if filing a separate return.
#3;Correct;read the note below.
#4;as mentioned above;aslongas the investor can pass the test of being a full time real estate professional (hours worked and documented), then h needs to file Sch/SE and needs to pay SECA tax to the IRS. Starting in 2013, aslongsas the investor makes over $200K ($250K if married filing jointly) will be subject to an additional 3.8% Medicare tax on the lesser of: (1) “net investment income” (e.g., interest, dividends, capital gains, royalties, passive income, etc.) or (2) the excess of MAGI over $200K ($250K if married filing jointly).
Note; Unearned income” means income from all “passive” activities, including interest, dividends, annuities, royalties and rents. It does not include income from an actively conducted business. However, it includes income from real estate rentals, even those that qualify as businesses, because rental income is always deemed to be passive income for tax purposes. Thus, landlords with profitable rentals whose AGI exceeds the threshold will be subject to the 3.8 percent tax on their rental income.However, there is one lucky group of landlords who can avoid the NII tax on rental income: real estate professionals(“It pays for landlords to qualify as ‘real estate professional‘ “), the NII law provides a special exemption for them. They are not subject to the 3.8 percent tax on rental income if they “materially participate” in the real estate activity, and the activity qualifies as a business for tax purposes.
#5; guess no change even if the pty is possessed by the investor thru an SMLLC; he still needs to file Sch C/SE on his rental income as a r/e pro.
#6; as mentioned above