Old law:

If you have a business, you file a Schedule C and pay Social Security taxes on earnings.

If you have a commercial or residential rental, it is considered an investment. You file on Schedule E and do not pay Social Security taxes on earnings.

In special cases such as boarding houses and hotel/motels, you have rentals that are businesses and file on Schedule C and pay Social Security taxes on profits.

Please note that I did not include “Real Estate professionals” (750 hour test). “Real Estate professional” is a special designation given by the IRS to allow larger losses from real estate rentals. It does not mean you operate a business. You still file Schedule E and do not pay Social Security taxes on profits.

New law:

We need clarification from IRS on what a “business” is.

WMH:

When it comes to the new tax laws, everyone wants to argue that they are a business according to the IRS.

When it comes to filing 1099-MISC forms, everyone wants to argue that they are not a business according to the IRS.

;)

- John...

Maybe you are overthinking this. The definition of a business has NOT changed. If you filed as a business in 201617 then you are still a business in 2018. If you were a pass through business in 2017 unless you change the entity you will still be a pass through business in 2018.

Many of the limitations are directed only affect owner occupied properties.

I did attend John's webinar and I think he a smart guy. I also have talked with my accountant who is both an accountant and RE investor. She assures me that we will definitely benefit from the new tax law.

Marv you are absolutely correct. And since the bulk of the changes won't go into effect until 2019 (for 2018 filings) it will most likely be a while before accountants and tax atty's know the full extent of the changes.

The sheer size of the bill is daunting so I don't see how acct. and tax. atty will have much time before the end of April to do a deep dive into the intricacies.

The main people who have to change are the C Corps. My Corps pay at a 15% tax rate. Now they are being raised to 21%. Bad Bad tax law. (couldn't resist).

Marv, Marv, Marv, I luv ya, but ya say some things that just ain't so.

"If you have a business, you file a Schedule C and pay Social Security taxes on earnings."

Generally true. Except with rentals. And farms. Probably some others I'm missing but do not work with very often.

"According to John Hyre, rental income is passive but it is still considered a business."

True. But requires more explanation. With non-rentals, there is very tangential connection with "passive" and "is it a trade or business." in that the level of activity is relevant for both concepts but also defined differently for each. With rentals, there is no connection at all because all rentals are defined as "passive". The only time level of activity matters for rentals & passive loss rules are when "material participation" or "real estate professionals" are involved - and the activity thresholds required for those two "statuses" have no connection to the activity required to be a "T/B".

Airbnb's are the exception, they are defined as "hotels not rentals".

Code Section 469 (Passive Activity Losses) and Code Section 162 (Deductions for a Trade or Business) lay out completely different standards for completely different purposes. On the other hand, the use of the term "trade or business" all on its own with no additional words or modifications is treated pretty uniformly for different code sections, at least as far as rentals are concerned. I think Section 199A will be added to the list of "treated the same way for purposes of what is a trade or business".

"That's what John says but I see no details in the new tax law that say that."

Typical. The new bill did not define a T/B. This is common, which is why there's a bunch of case law that defines T/B in the context of rentals for various different parts of the Internal Revenue Code. I posted a fair number of them on a different thread. Can Courts decide to start fresh on Section 199A and invent brand new definition of T/B for rentals? Sure. Given ease & past patterns with similar issues, that is also very unlikely.

John (not me) wrote:

"When it comes to the new tax laws, everyone wants to argue that they are a business according to the IRS.

When it comes to filing 1099-MISC forms, everyone wants to argue that they are not a business according to the IRS."

I think that is a very fair point!

Bottom line: We go with what we've got. And what we've got is actually quite a lot. Odds are very, very high that existing T/B for rental RE rules will apply. And that is good, since the existing rules make it easy for rentals to be a T/B. And in any event, they are all we've got to go on.

John Hyre

Thanks for your input, John -- really appreciate it!

I am curious though -- since we're on it -- how do you feel about 1099-MISC filing? Do you think that most average landlords (i.e. people that don't meet the real estate professional mark and maybe own anywhere from 1-10 (or possibly more) rentals, but don't necessarily do it full time as their day job) -- should have to file 1099-MISC forms for those non-corps that they pay over $600/year to?

We've had that discussion many times here -- and it is again one of those "clear as mud" things that tends to come down to a Trade/Business argument.

I am therefore curious what you think about it. Do most of us need to be filing 1099-MISC forms or are we exempt from having to do so because we aren't a T/B?

- John...

My position is that since you are not a "business" you don't need to file 1099s.

John-

If rentals are businesses then why don't they file pay Social security taxes on their profits?

By the way, farm businesses file sch F and pay SS on profits.

I issue 1099's to everyone over $600 unless they are incorporated but I am set up as an LLC.

Here is my understanding (John Hyre can correct me if I'm off base):

Rentals are a business. They make money. However, if I own three rentals in my own name, the profit passes to me, like NC said, as a distribution. Even though I'm signing leases, scheduling contractors, and relighting pilot lights, it doesn't count as wage income (assuming I'm under 750 hrs/yr), so I don't pay SS/Medicare.

However, I can set up a management LLC that collects a "reasonable and customary) management fee from the rentals, typically 6-10% of gross rents. So if the gross from my 3 rentals is $3K/month, Robin's Property Management, LLC collects $3600/yr in management fees which it can then pay to me for my hard work. That means I DO pay SS/medicare taxes, but it's also one more year that counts toward my 30 years to qualify for SS. And I could then put that money in an IRA.

It probably wouldn't make sense to form a management LLC for tax purposes if I only had 3 rentals, but if I had 20 like that, Robin's Property Management could collect $24K/yr which it could pay to me and I could put in an IRA, and that becomes a valuable way to get money into a retirement account more quickly. So you really need to tailor your approach to your individual circumstances.

Marv: You're missing my point. This entire thread is trying to argue that when it comes to the new tax laws, that rentals ARE A BUSINESS. That is what many here are saying -- including, from what I understand, John Hyre.

That is why I made the post above mentioning that everyone wants it to be a business when it comes to the new laws, but does NOT want it to be a business when it comes to filing 1099-MISC.

John Hyre replied and agreed it was an interesting situation or "fair point."

So, I'm simply asking him his opinion on 1099-MISC forms since, to me, they seemed a bit tied together. Either they are a business and both the new tax benefits apply as well as filing 1099-MISC -- or they are NOT a business so neither would apply.

It is weird to me that people want to have it both ways -- "trade or business" when it comes to beneficial tax laws -- but not "trade or business" when it comes to annoying tax laws (like 1099-MISC).

- John...