2-29 Partner Self- Employment Income FICA on wages is all on labor SECA is on labor and capital 1 Partner SE Income General Rule: Distributive share of income and guaranteed payments to partners are SE Income (SECA) IRC sec. 1402(a)(1) Limited Partners Exclusion: Limited partner business income and guaranteed payments to such limited partners for capital are not SE income LP guaranteed payments for services are SE income (IRC sec. 1402(a)(13))
SE Income Avoidance With Partnerships CBO Report 2-30 Link How to avoid SECA entirely? Be a state law limited partner! (in IRC sec. 1402(a)(13))
[T]here shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described No in Requirement section 707(c) that to that partner Guaranteed for services payments actually be rendered made. to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services; IRC sec. 1402(a)(13)) Similar to being an S Shareholder Gross income from S Corp is not subject to SE tax IRC sec. 1402(a)(1) Rev. Rul. 59-221 X 1,000 hrs FICA on W-2 Wages No SE Income Z 0 Hrs No SE Income S Corporation Trucking Business Profitable
What about the 3.8% NIIT in 2013? SE Income Is Excluded From NII Business (sec. 162) Income Escapes NII if: X Z Nontrading Nonpassive 1,000 hrs No SE Income Not NII -- nonpassive 0 Hrs No SE Income NII -- passive S Corporation Trucking Business Profitable
What if Shareholder Z participated for 200 hours? (Z owns no other SPAs) A SPA so income is recharacterized as nonpassive per Temp. Reg. 1.469-2T(f)(2) Does that mean Z does not have IRC sec. 1411 NII? No. Per the preamble, gross income is recharacterized as nonpassive under IRC sec. 469, but the activity is passive for purposes of IRC sec. 1411 Can we accomplish the same feat (NO SE and No NIIT) with a limited partner? Yes, but Y and Z Zero Participation Focus on Y GP X 1% 1,000 Hrs. General Partner SE Income 49.5% Limited Partner No SE Income Limited Php XYZ Trucking Business LP Y 49.5% Limited Partner LP Z No SE Income
Y also owns a controlling interest in a grocery store partnership (or Sch C or S Corp), that Y participates in for 1,000 hours In prior years, Y never bothered to group the XYZ LP interest with the grocery store business because both were profitable. In 2013, can Y group the two into a single activity (appropriate economic unit)? Yes, if Y is subject to the NIIT in 2013, a one-shot regrouping election is allowed 2-25 Y and Z Zero Participation Focus on Y GP X 1% 1,000 Hrs. General Partner SE Inc. 49.5% Limited Partner No SE Inc. Limited Php XYZ Trucking Business LP Y 49.5% Limited Partner LP Z No SE Inc
Y With Grouping GP X 1% 1,000 Hrs. General Partner SE Inc. 49.5% Limited Partner Limited Php XYZ Trucking Business LP Y No SE Inc. No NII--Nonpassive 49.5% Limited Partner LP Z No SE Same Example But with Limited Partnership Where a Partner is a GP and LP X is an LP and GP 1,000 hours of Participation Focus on X s LP Interest GP- X 1% 1,000 Hrs. General Partner SE Inc. 49.5% Limited Partner Limited Php Trucking Business Profitable LP- X 49.5% 0 Hrs. Limited Partner LP Z X s LP interest is excludible from SE tax under IRC sec. 1402(a)(13)
Prop. Reg. Sec. 1.1402-2(h)(3) also protects X X fails to be an LP per Prop. Reg. Sec. 1.1402-2(h)(2) Prop. Reg. Sec. 1.1402(a)-2(h)(2) An individual is a limited partner unless the individual 1) Has personal liability; or 2) Has authority to contract on behalf of the partnership; or 3) Participates more than 500 hours during the partnership's taxable year. Prop. Reg. Sec. 1.1402-2(h)(3): Exception for holders of more than one class of interest. An individual holding more than one class of interest who is not treated as a limited partner under paragraph (h)(2) is treated as a limited partner under (h)(3) with respect to a specific class of partnership interest held by such individual if, Immediately after the individual acquires that class of interest-- (i) Limited partners within the meaning of paragraph (h)(2) own a substantial [20% or more], continuing interest in that specific class of partnership interest; and, Note: need Z under 500 hours.
(ii) The individual's rights and obligations with respect to that specific class of interest are identical to the rights and obligations of that specific class of partnership interest held by the limited partners described in (i) above. X s LP interest remains an LP interest per the prop. regs. -2(h)(3) X 1% 1,000 Hrs. General Partner SE Inc. 49.5% Limited Partner NO SE Inc. NO NII -- Nonpassive Limited Php Trucking Business Profitable X 49.5% 0 Hrs. Limited Partner Z Note: X could be paid a guaranteed payment for services or capital with respect to the general partnership interest if SE income is sought. Can SE Tax and NIIT Be Avoided on the General Partner interest?
X Y X -- 2,000 hours Y-- 1,000 hours Z 0 hours X S Corporation 33% Y LP 33% 1% NO SE Inc. Z LP X & Y GP NO NII -- Nonpassive 33% Limited Partnership LP Trucking Business Z NII -- Passive No SE on Z per IRC sec. 1403(a)(13) No SE on X & Y per Prop. Reg. 1.1402(a)-2(h)(3) 2-16 Note: To rely on prop. reg. sec. 1.1402-2(h)(3), you need at least a 20% LP who meets -2(h)(2) (Z here) X Y X -- 2,000 hours Y-- 1,000 hours Z 0 hours X X -- 2,000 hours Y-- 1,000 hours Z 0 hours LLC 1% GP 33% LP X 33% LP Limited Partnership Y 33% LP Z SMLLC 1% GP 33% LP X 33% LP Limited Partnership Y 33% LP Z SE Tax on 1% only per Prop. Reg. 1.1402(a)-2(h)(3) 2-16 SE Tax on 1% only per Prop. Reg. 1.1402(a)-2(h)(3)
When is an LLC or LLP member a limited partner? When is an LLC or LLP member a limited partner? Renkemeyer Law Firm Renkemeyer 2-32 [T]he intent of section 1402(a)(13) was to ensure that individuals who merely invested in a partnership and who were not actively participating in the partnership s business operations [did not receive social security credit] Renkemeyer s position was contrary to the proposed regs which declare that a professional service business generates SE Income
LLC Member Z is a limited partner per prop. reg. sec. 1.1402-2(h)(2) X 1/3 1,000 Hrs. Managing Member SE Inc. 1/3 600 Hrs. Nonmanaging Member LLC Trucking Business Profitable Y 1/3 0 Hrs. Z Nonmanaging Member No SE Inc. Prop. Reg. Sec. 1.1402(a)-2(h)(2) An individual is a limited partner unless the individual 1) Has personal liability; or 2) Has authority to contract on behalf of the partnership; or 3) Participates more than 500 hours during the partnership's taxable year. Z Meets: Prop. Reg. sec. 1.1402-2(h)(2) and Renkemeyer s interpretation of IRC sec. 1402(a)(13)
Focus on Z No SE Income But what about the 3.8% NIIT In 2013? LLC Member Z is a limited partner per prop. reg. sec. 1.1402-2(h)(2) X 1/3 1,000 Hrs. Managing Member SE Income 1/3 600 Hrs. Y 1/3 0 Hrs. Z Nonmanaging Member Nonmanaging Member No SE Income NII--Passive LLC Trucking Business Profitable Absent grouping, Z does not materially participate in the trucking business so Z has passive business income thus IRC sec. 1411 net investment income. SE Tax Relief for LLC nonmanaging members who are over 500 hours? Prop. Reg. 1.1402-2(h)(4)
Y is a limited partner per the prop. regs. -2(h)(4), but not -2(h)(2) Prop. Reg. 1.1402-2(h)(4) Example X 1/3 1,000 Hrs. Managing Member SE Inc. 1/3 600 Hrs. Nonmanaging Member No SE Inc. Per Prop. Regs. Y LLC Trucking Business Profitable 1/3 Z 0 Hrs. Nonmanaging Member No SE Inc. Exception for holders of only one class of interest. An individual who is over 500 hours, but otherwise meets -2(h)(2), is treated as a limited partner under this paragraph (h)(4) with respect to the individual's partnership interest if, immediately after the individual acquires that interest. (i) LPs meeting (h)(2) own a substantial (20%), continuing interest in that specific class of partnership interest; and
(ii) The individual's rights and obligations with respect to the specific class of interest are identical to the rights and obligations of the specific class of partnership interest held by the limited partners described (i) above. Y is a limited partner per the prop. regs. -2(h)(4), but not -2(h)(2) X 1/3 1,000 Hrs. Managing Member SE Inc. 1/3 600 Hrs. Nonmanaging Member No SE Inc. Per Prop. Regs. LLC Trucking Business Profitable 1/3 Z 0 Hrs. Nonmanaging Member No NII -- NonpassiveNo SE Inc. Y If you were an IRS agent how would you attack Y? Recall: Y is an LLC member, not a state law limited partner Beware of Renkemeyer: LLP/LLC income is limited partner (no SE tax) income if held in the nature of an investment. (regardless of liability limit). Y, with 600 hours of participation is arguably not holding the business as a mere investment.
But Remkemeyer involved a service partner in a professional service LLP subject to SE tax under the proposed regs. Per Chief Counsel IRS will not litigate contrary to its own proposed regulations if no temporary or final regulations on point. The Tax Court in Remkemeyer correctly ignored the proposed regulations. Chief Counsel attorneys cannot ignore proposed regulations Chief Counsel Notice CC-2003-014 If there are no final or temporary regulations currently in force addressing a particular matter, but there are proposed regulations on point, consistent with the principles set forth in rules (2) and (2)(a), Chief Counsel attorneys should look to the proposed regulations to determine the office's position on the issue. Thus, Chief Counsel attorneys ordinarily should not take any position in litigation or advice that would yield a result that would be harsher to the taxpayer than what the taxpayer would be allowed under the proposed regulations. Other Related SECA Issues 63
SECA Exclusion for Rents, Dividends and Interest Exclusion: Real estate rents, dividends, interest, and property sale gain, are not subject to SE tax. (IRC sec. 1402(a)(1) & (2)) Exception to Exclusion: Inventory or property held for sale is subject to SE tax (dealers in real estate, stocks and securities, etc.) Exception To Exclusion Real estate rents, interest and divdends are SE income if received in the course of business as a dealer in real estate or securities. IRC sec. 1402(a)(1) Rents IRC sec. 1402(a)(1) The term net earnings from selfemployment means the gross income derived by an individual from any trade or business carried on by such individual there shall be excluded rentals from real estate unless such rentals are received in the course of a trade or business as a real estate dealer;
Who is a real estate dealer? Reg. sec. 1.1402(a)-4 In general, an individual who is engaged in the business of selling real estate to customers with a view to the gains and profits that may be derived from such sales is a real-estate dealer [and rents on real estate held for sale are subject to SE tax].. Dealer in Real Estate. Real estate held for sale as a dealer is ordinary income on sale and subject to SE tax. The issue in the caselaw is: Is sale gain capital gain (capital asset) or ordinary income (held for sale inventory)? If held for sale, then rentals of the property would also be subject to SE tax Michael L. Rockwell, TC Memo 1972-133. Is a Real Estate Broker a Dealer in Real Estate? No
A broker receives a commission from sales of other people s property. The commissions are fees for services and are subject to SE tax. A broker may also owns rental real estate as an investment (not held for sale). A broker, even if an IRC sec. 469(c)(7) real estate professional whose investment rentals are nonpassive, the broker is not a dealer subject to SE tax on the rental property. A real estate broker, who meets IRC sec. 469(c)(7), may own 50 nonpassive rentals, and the rental income is not subject to SE tax. Can a Real Estate Dealer Hold Rental Real Estate for Investment? Yes.Where a real-estate dealer holds real estate for investment or speculation in addition to real estate held for sale to customers in the ordinary course of his trade or business as a real-estate dealer, only the rentals from the real estate held for sale to customers in the ordinary course of his trade or business as a realestate dealer, are included [in SE income] (Reg. sec. 1.1402(a)-4)
Avoidance of 3.8% 2013 NIIT What About A real estate professional who materially participates in his/her rentals can avoid both: SE tax on rent (not a dealer) NIIT on rent--a nonpassive trade or business a Hotel? Not Rental Real Estate! Payments for the use or occupancy of rooms or other space where services are also rendered to the occupant, such as for the use or occupancy of rooms or other quarters in hotels,.do not constitute rentals from real estate; consequently, such payments are included in determining net earnings Reg. sec. 1.1402(a)-4(c)(2) Community Property Business
Community Property Business Per the check-the-box regulations, a co-owned business that does not check-the-box to be a corporation, defaults to partnership status. As a result the check-the-box regulations eliminated soleproprietorship status for a husband-wife community property business. This was contrary to IRC sec. 1402(a)(5)(A) IRC sec. 1402(a)(5)(A) Rev Proc 2002-69 overrides the inconsistency created by the check-the-box regulatons 1-12 84
Spouse Owned Community Property Business Entity Authority SE Impact Entity Authority SE Impact Sole proprietorship Coproprietorship Coproprietorship Rev. Proc. 2002-69 and IRC sec. 1402(a)(5)(A) first clause. Rev Proc. 2002-69 and IRC sec. 1402(a)(5)(A) second clause if jointly operated IRC sec. 1402(a)(17) QJV if both spouses materially participate All income to spouse who carries on the business. Share income between spouses based upon respective distributive share. Share income between spouses based upon respective interests in venture. Partnership Corporation Default rule per check-the-box regs. Reg. sec. 301.7701-3(b)(i) Elect per checkthe-box regs. Reg. sec. 301.7701-3(a) 50-50 General Partners; each spouse s php income is SE income. None The ONLY two options if two nonspouses Co-own an unincorporated business Self-Study Problem 9 1-22 1-22 Husband/Wife Community Property Business NO SE Income because real estate rental income and all net investment income because passive rental income
SE Income Example H has been treating his community property Schedule C trucking business as a sole-proprietorship-- Schedule C profit of $100,000 per year. W is an employee with a salary of $150,000 per year. She does not participate in H s business. Why might H want to treat his Schedule C business as a partnership? Shift one-half of SE income to W who will only pay at 2.9% on her half. If H wants more than one-half, he should pay himself a guaranteed payment. Could be done on an amended return. This may, in particular, make sense for same-sex couples who now will, post-windsor, be treated the same as opposite sex couples (discussed below)
Co-Proprietorship Example In the prior example, if W also participated in H s business, then Schedule C income could be allocated to her without the need for a Form 1065. IRC sec. 1402(a)(5)(A) second clause. IRC sec. 1402(a)(5)(A) Could be an IRC sec. 1402(a)(17) qualified joint venture if both spouses materially participate Prior to the Windsor Supreme Court override of DOMA, IRS, in Q&A 11, said that neither Rev Proc 2002-69, nor IRC sec. 1402(a)(5) applied to same-sex couples.
DOMA Sec. 7 Definition of marriage and spouse ``In determining the meaning of any Act of Congress, or of any ruling, regulation, the word `marriage' means only a legal union between one man and one woman as husband and wife, and the word `spouse' refers only to a person of the opposite sex who is a husband or a wife.''. Windsor DOMA is unconstitutional Majority opinion by Judge Kennedy stated that its opinion and holding were confined to lawful marriages. (RDP?) IRC sec. 1402(a)(5)(A) Clearly IRC sec. 1402(a)(5)(A) applies to same-sex married couples. Rev Proc 2002-69 refers to husband and wife, not spouses or married. Does Rev. Proc. 2002-69 apply to a same-sex couple? Clearly, IRC sec. 1402(a)(5)(A) applies to same sex couples, so
2013 Tax Rate Schedules 1 39.6% on Taxable Income Over: $400,000 Single $425,000 H of H $450,000 MFJ $225,000 MFS 2 2013 Capital Gains/ Dividends Rates 3 Top regular rate for dividends and LT capital gains is 20% if TI is in 39.6% bracket 4
If not in 39.6% bracket, maximum LTCG rate remains at 15% Married Filing Jointly If Taxable Income is: Tax Rate Not over $17,850 10% $17,851 to $72,500 15% $72,501 to $146,400 25% $146,401 to $223,050 28% $223,051 to $398,350 33% $398,351 to $450,000 35% 0% if below 25% bracket Over $450,000 39.6% 5 6 2013 Top rates Net Investment Income : Permanent LTCG: 23.8% (20 + 3.8) Dividends: 23.8% NII: 43.4% (39.6 + 3.8) 7 8
Affordable Care Act: Tax Provisions: 2013 Additional Medicare Tax on High-Income Taxpayers 6 High-Income Employees High-Income Self-Employed High-Income Investors (including trusts & estates) High-Income Employees 3101(b)(2) High-Income Self-Employed 1401(b)(2) High-Income Investors (including trusts & estates) 1411 3 Separate Taxes
High-Income : $250,000 for MFJ $125,000 for MFS $200,000 for all others High Income Employees additional 0.9% Medicare tax High Income Self-Employed High-Income Investors High Income Employees additional 0.9% Medicare tax High-Income Self-Employed additional 0.9% SE tax High-Income Investors High Income Employees additional 0.9% Medicare tax High Income Self-Employed additional 0.9% SE tax High-Income Investors new 3.8% tax on NII
Link to IRS Website Q&As Additional Medicare High Income Employees Additional 0.9% Medicare tax on wages over: $250,000 for MFJ $125,000 for MFS $200,000 for all others Additional 0.9% Medicare tax on wages over: $250,000 for MFJ H wages = $120,000 W wages = $200,000 $320,000 $250,000 for MFJ H wages = $120,000 W wages = $200,000 $320,000-250,000 $70,000
$250,000 for MFJ H wages = $120,000 W wages = $200,000 $320,000-250,000 $70,000 $70,000 x 0.9% = $630 Additional 0.9% Med. tax on wages Employer witholds once wages go over $200,000 H wages = $120,000 W wages = $200,000 $320,000-250,000 $70,000 $70,000 x 0.9% = $630 No Withholding: Tax Will be Paid with Return H wages = $ 0,000 W wages = $250,000 $250,000-250,000 $0 But withholding = $50,000 x 0.9% = $450
H wages = $ 0,000 W wages = $250,000 $250,000-250,000 $0 But withholding = $50,000 x 0.9% = $450 Refund on Form 1040 High Income Employees additional 0.9% Medicare tax High-Income Self-Employed additional 0.9% SE tax High-Income Investors High Income Self-Employed High-Income Self-Employed additional 0.9% SE tax Not considered SE tax for purposes of income tax deduction Additional 0.9% SE tax on SE income over: $250,000 for MFJ $125,000 for MFS $200,000 for all others
Additional 0.9% SE tax on SE income over: $250,000 for MFJ $125,000 for MFS $200,000 for all others $250,000 for MFJ W Wages = $0 H SE income = $350,000 Thresholds are reduced by amount of wages subject to Medicare tax $250,000 for MFJ W Wages = $0 H SE income = $350,000 $350,000-250,000 $100,000 $250,000 for MFJ W Wages = $0 H SE income = $350,000 $350,000-250,000 $100,000 $100,000 x 0.9% = $900
$250,000 for MFJ W Wages = $225,000 H SE income = $350,000 $250,000 for MFJ W Wages = $225,000 H SE income = $350,000 $350,000 $250K - $225K = - 25,000 $325,000 $250,000 for MFJ W Wages = $225,000 H SE income = $350,000 $350,000 $250K - $225K = - 25,000 $325,000 $325,000 x 0.9% = $2,925 Or to look at it another way... W wages = $225,000 H SE Inc = 350,000 $575,000-250,000 $ 325,000 $325,000 x 0.9% = $2,925
AGI Is Irrelevant $250,000 for MFJ W Wages = $350,000 H SE income = <$350,000> Thresholds are reduced by amount of wages subject to Medicare tax $250,000 for MFJ W Wages = $350,000 H SE income = <$350,000> $100,000 x 0.9% = $900 High Income Employees additional 0.9% Medicare tax High Income Self-Employed additional 0.9% SE tax High-Income Investors new 3.8% tax on NII
New Code 1411 Unearned Income Medicare Contribution New 3.8% Tax on so-called Net Investment Income New IRS Form 8960 Net Investment Income Investment Income minus Allocable Deductions Investment Income Does Not Include: Investment Income Does Not Include: Items excluded from gross income - e.g., muni bond interest, 121
Investment Income Does Not Include: Items excluded from gross income - e.g., muni bond interest, 121 Distributions from retirement plans Investment Income Does Not Include: Items excluded from gross income - e.g., muni bond interest, 121 Distributions from retirement plans Income subject to SE Tax Investment Income Does Not Include: Items excluded from gross income - e.g., muni bond interest, 121 Distributions from retirement plans Income subject to SE Tax Does Not Include: Trade or Business Income, if the taxpayer materially participates under IRC sec. 469, and not a business of trading in financial instruments or commodities.
Gross Investment Income minus Allocable Deductions = Net Investment Income Category One Category Two Category Three Gross Investment Income (before deductions) Gross Income Interest, Dividends, Annuities, Royalties, and Rents that are: Nonbusiness (investment) Passive business income Trading business income Other Gross Income that is: Passive business income or Trading business income Net Gain from the disposition of property that: Nonbusiness (invest. or personal) Passive business Trading business Category One Gross Income Interest, Dividends, Annuities, Royalties, and Rents that are: Nonbusiness (invest.) Passive business inc. Trading business inc. What escapes category one? Nonpassive business income except for trading income. Category One Category Two Category Three Gross Investment Income (before deductions) Gross Income Interest, Dividends, Annuities, Royalties, and Rents that are: Nonbusiness (investment) Passive business income Trading business income Other Gross Income that is: Passive business income or Trading business income Net Gain from the disposition of property that is: Nonbusiness (invest. or personal) Passive business Trading business
Category Two Other Gross Income that is: Passive business income or Trading business income What escapes category two? Nonpassive business income (except for trading income), and investment income. Category One Category Two Category Three Gross Investment Income (before deductions) Gross Income Interest, Dividends, Annuities, Royalties, and Rents that is: Nonbusiness (investment) Passive business income Trading business income Other Gross Income that is: Passive business income or Trading business income Net Gain from the disposition of property that is: Nonbusiness (invest. or personal) Passive business Trading business Category Three Net Gain from the disposition of property that is: Nonbusiness (invest. or personal) Passive business Trading business What escapes category three? Nonpassive business gain except for trading assets. Category One Category Two Category Three Gross Investment Income (before deductions) Gross Income Interest, Dividends, Annuities, Royalties, and Rents that is: Nonbusiness (investment) Passive business income Trading business income Other Gross Income that is: Passive business income or Trading business income Net Gain from the disposition of property that is: Nonbusiness (invest. or personal) Passive business Trading business
What about net losses? <$3,000> capital loss in category three does not offset category one or two. Capital loss carryovers can reduce subsequent year category three gain. NOLs never reduce NII, but do reduce AGI. Category One Category Two Category Three Gross Investment Income (before deductions) Gross Income Interest, Dividends, Annuities, Royalties, and Rents that is: Nonbusiness (investment) Passive business income Trading business income Other Gross Income that is: Passive business income or Trading business income Net Gain from the disposition of property that is: Nonbusiness (invest. or personal) Passive business Trading business Tax Calculation: 3.8% Tax on Net Investment Income
Tax Calculation: 3.8% of lesser of: NII MAGI > threshold 3.8% of lesser of: NII MAGI > threshold $250,000 for MFJ $125,000 for MFS $200,000 for all others $200,000 for Single X wages = $350,000 NII = $10,000 MAGI = $360,000-200,000 $160,000 $200,000 for Single X wages = $350,000 NII = $10,000 MAGI = $360,000-200,000 $160,000 $10,000 x 3.8% = $380
$200,000 for Single X wages = $350,000 NII = $10,000 MAGI = $360,000-200,000 $160,000 $10,000 x 3.8% = $380 $150,000 x.9% = $1,350 Example 2 Single T/P Wages = $100,000 Int/Divs = 10,000 Single T/P Wages = $100,000 Int/Divs = 10,000 Single T/P Wages = $100,000 Int/Divs = 10,000 House Sale Gain = $370,000 House Sale Gain = $370,000 121 Exclusion = - 250,000 Taxable Gain = $120,000
Single T/P Wages = $100,000 Int/Divs (Cat. 1 NII) = 10,000 House Sale Gain = $370,000 121 Exclusion = - 250,000 Taxable Gain (Cat. 3 NII): 120,000 MAGI = $230,000-200,000 Taxable NII = $30,000 New 3.8% Tax Applies to Trusts & Estates NIIT = $1,140 (3.8% x $30,000) Not: Charitable Trusts Retirement Plans Tax Calculation: 3.8% of lesser of: NII FAGI > top bracket $11,950
Fiduciary AGI = Total income reduced by the personal exemption and the deductions for costs that would not have been incurred had the property not been held in an estate or trust. Selected Examples A is a Typical Lessor 2-5 Alter the facts. If: (1) A real estate professional and (2) A material participant in the rental then no NII
Working capital income is always in category one
Trade of Business Test is at the Entity Level Dealers in financial instruments are subject to SE tax so is NOT NII. Compare with Carol in Example 5 who escapes NII on interest income of a bank. Category Three Net Gain Category one investment income of $5,000 The <$3,000> capital loss does NOT reduce the $5,000 of category one investment income
When is rental real estate a trade or business? Bottom Line: Partner Reporting Self-Rental Recharacterization Issue CPA Debbie 100% Materially Participates RENT Profitable Nonpassive Gross income but NII S CORP Business
2013 + One Shot Regrouping Option GROUP AS ONE BUSINESS ACTIVITY CPA Debbie 100% Materially Participates RENT Profitable Nonpassive Activity NO NII S CORP Business GROUP AS ONE BUSINESS ACTIVITY X 100% Materially Participates Grouping Strategy for 2013 for Self-Rentals: 2-23 RENT Non-Passive Loss S CORP Business
More typically, material participation in a vacation rental will be difficult to prove.