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.

In your CPA firm's experience, what is the most material overlooked deduction in the estate, gift and trust income tax area

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