Tax planning for real estate activities often involves a myriad of tax considerations. For example, if the real estate produces a loss, a determination must be made whether the loss is limited by insufficient basis or by the at-risk or passive activity loss rules which arise under IRC sections 465 and 469. When income is generated, other questions arise, including whether such income will qualify for the IRC section 199A deduction introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, whether the income may be subject to the net investment income tax surcharge of 3.8% under IRC section 1411, and whether the rental income will be subject to self-employment tax. This article discusses the intersection of rental real estate and the self-employment tax.
In a Chief Counsel Advice issued on December 23, 2021, CCA 202151005, the IRS discussed various rules relating to the application of self-employment tax by describing two general fact patterns. The CCA involved limited issues, but provides a good starting point for understanding how the IRS classifies real estate rentals for self-employment tax purposes. Both fact patterns involve the application of IRC sections 469(c) and 1402(a)(1) to short-term residential rentals from real estate. IRC section 469 describes the rules related to passive activities, and IRC section 1402 discusses net earnings from self-employment (NESE).
In the first example, the individual taxpayer provided various services and accommodations...
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