Leasing to Transients - Self Employment Taxation Consequences
Income sources primarily from the rental real estate on a short term basis may fall out side the Self Employment Tax exemption applicable to rental income from long-term leases.
Income from the rental of real estate, determined on a per dwelling unit basis, in which contract tenancy is for seven or more days is not subject to the 15.3% self employment (SE) tax as provided for under IRC Section 1402. On the other hand, income from short-term rentals, a restaurant or gift shop would be subject to SE tax.
Compensation Paid to Partners from Rental Revenue Sources Need Not Incur Annual SE Tax
Partners paid up to $118,500 in 2016 would incur approximately $16,700 of SE tax (before deduction offset). Important - By not having a written agreement as to how profit, losses and compensation to partners should equitably be determined, the allocation of rental income to "Guaranteed Payments" converts non-SE income, such as from real estate rentals of more than 7 days, into SE income.
There are mechanisms available to help alleviate such income recharacterization.
It should be noted however that IRC Section 179 deductions are not permitted for rentals greater than 7 days.
To avoid SE taxation, those renting real estate to transients must document the average days of stay even though statistics. Accordingly, after learning the intricacies of the regulations for measurement; a study should be undertaken to determine average lengths of stay.
If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, PLLC
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