QBI Regulations - Schedule E rental

I am just curious. Is it just a co-incident that the IRC code number is '1402'? Or they intentionally made it correspond to the SE tax rate in order to make it easier to remember?

Huh? The SE tax rate is 15.3% (sec. 1401). When sec. 1402 was added to the 1954 Code, the rate was 3%.

Not rental income will not be subject to SE tax because it is a 162 trade or business. This is not a new thing (the rental as a trade or business part) and there is plenty of case law on the subject. There is no tipping the scales in the wrong direction - rental income is not subject to SE tax, unless significant services are provided.

Rental income is not excluded from self employment tax if it is earned on property held by a delear in real estate and that property is treated as being for sale to customers.

§ 1.1402(a)-4 Rentals from real estate.

(a)In general. Rentals from real estate and from personal property leased with the real estate (including such rentals paid in crop shares) and the deductions attributable thereto, unless such rentals are received by an individual in the course of a trade or business as a real-estate dealer, are excluded.

If property is held for sale to customers, it is not a capital asset. and income from the sale of that asset is ordinary income.

In Malat v. Riddell 383 US 569 (1966) the Supreme Court determined that a dealer in real estate can hold both property available for sale to customers and propety that is being held for investment. The status of each property is determined individually. It becomes a question of facts and curcumstsances.

Here is a good article discussing the framework used to decide whether property is for sale to customers or held as an investment:

http://www.fletchertilton.com/1C2194/as ... Dealer.pdf

In the situation I described, the taxpayers have made every effort to treat their property holdings as property held for investment. However, the properties are being improved (sometimes substantially) and are very often sold after a few years (not everyone works as fast as Tarek and Christina). In that case, the taxpayers broker the sale. If the taxpayers attempt to add to this fact pattern to show that their rental property holdings represent a trade or business under Section 162 (in order to qualify under Section 199A), there is concern that the additional business like aspects of the deal may tip the scales away from treating the property as property held for ivestment. In that case, self employment tax would apply and the property would not be a capital asset. Gain on sale would be treated as ordinary income.

I get that this is probably not a major concern for most taxpayers, but it is relevant to some of the clients I deal with.

That is an excellent post on when brokers need to pay SE tax on rentals. However, there is nothing in the new law that changed that in any way, nor in my opinion increased the risk on investors seeking to avoid being classified as brokers. The threshold for being a broker is miles higher than for a rental being an trade or business.

I think the key to understanding the “dealer exception” in sec. 1402(a)(1) is the phrase, “received in the course of a trade or business as a real estate dealer.”

As pointed out in the FletcherTilton article and in several other articles I’ve seen on this subject (such as https://img1.wsimg.com/blobby/go/310b78 ... 183092.pdf), a real estate dealer can hold real estate for investment separate and apart from other properties that the real estate dealer holds for sale to customers. If the properties held for investment generate rental income, then the net rental income isn’t subject to SE tax.

The type of rental income that is targeted by sec. 1402(a)(1) in the “dealer exception” is rental income generated by properties that are held by the dealer for sale to customers. For example, suppose a builder of a residential subdivision sells out all of the homes, and while the models are up for sale, the builder leases them temporarily to tenants. The rental income will be subject to SE tax, assuming that the builder is an unincorporated business.

But I agree with TaxMonkey that this is nothing new, that there is nothing in 199A or the proposed regs that increases the risk that a taxpayer will be labeled a dealer, and that the threshold for being a dealer "is miles higher than for a rental being a trade or business."

Would an ancillary issue to the taxpayer treating the rental property as subject to the 20% deduction be the requirement to file 1099-MISCs due to their admission as being a trade or business?

I have always advised my clients with rental properties to issue 1099s to workers who they pay more than $600 per year, so I’ve never had to "play both sides of the street" over the issue of whether it’s a business for one purpose and not a business for another purpose.

I am just curious. Is it just a co-incident that the IRC code number is '1402'? Or they intentionally made it correspond to the SE tax rate in order to make it easier to remember?

Huh? The SE tax rate is 15.3% (sec. 1401). When sec. 1402 was added to the 1954 Code, the rate was 3%.

On Schedule SE of a self-employed taxpayer, because of the reduction due to line 4, the final percentage is less than 15.3%. And I always have the impression that the net percentage is about 14.02%. Perhaps I am off a bit there. But the point is still that the final SE rate of an self-employed individual is much more close to 14.02 than 15.3.

On Schedule SE of a self-employed taxpayer, because of the reduction due to line 4, the final percentage is less than 15.3%.

That would be like saying that the regular income tax rates apply to AGI, not taxable income, and therefore aren't really what they purport to be. The SE tax is most definitely 15.3% of net earnings from self employment. Why are you trying to apply that rate to something it doesn't apply to, such as net profit?

The point that BestQuestion made in #47 is that Congress made section 1402 to correspond to the SE tax rate. But that’s been debunked, because when Congress enacted section 1402, they set the SE tax rate at 3%.

The notion that code sections or even form numbers could or should have mnemonic properties is fun to play with, even if not a good idea in practice. Someday we should be able to see somewhere in the U.S. code a "Section 420" legalizing marijuana. Is Section 666 deliberately avoided, similar to the idea that some elevators don't show a stop on the 13th floor even when there is one? We do already have IRS Form 911 "Request for Taxpayer Advocate Service Assistance".

I am just curious. Is it just a co-incident that the IRC code number is '1402'? Or they intentionally made it correspond to the SE tax rate in order to make it easier to remember?

Huh? The SE tax rate is 15.3% (sec. 1401). When sec. 1402 was added to the 1954 Code, the rate was 3%.

On Schedule SE of a self-employed taxpayer, because of the reduction due to line 4, the final percentage is less than 15.3%. And I always have the impression that the net percentage is about 14.02%. Perhaps I am off a bit there. But the point is still that the final SE rate of an self-employed individual is much more close to 14.02 than 15.3.

0.9235 × 0.153 = 0.1412955, so "1413" would have been a better mnemonic, if that had been intended.

We didn't have the .9235 in 1954.

I am bumping this because there is a reference to Spilldell in the thread. Spilldell recently had a webinar where one of the topics was going to be "Discuss the controversy surrounding rental income and whether it qualifies as QBI". Did anyone participate in the webinar and can share any conclusions? I am too cheap to subscript because I only do taxes now as a volunteer:) (However, I do keep my EA active:)