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
All Original Content ©
1999-2023. Dana S. Beane & Company, PLLC All Rights
Reserved.
If you have any
questions with regards to the use of these documents, please
read our
Disclaimer.
If quoting Dana S.
Beane & Company, PLLC's editorial content in any printed
or promotional materials, Dana S. Beane & Company, PLLC
requires that you submit the quoted material to them, and that
you sign an agreement with Dana S. Beane & Company, PLLC
stating that you will use it in context, attribute the quote
accurately, and identify Dana S. Beane & Company, PLLC as
the source.