In November of 2021, the IRS released Chief Counsel Advice (CCA) 202151005 discussing rental activities and if self-employment tax should be calculated. CCAs can be thought of as discussions the IRS have internally to state their views on certain items. They are not precedent and are not IRS code or regulations.
Self-employment income is income from performance of service that are not consider wages because an employer/employee relationship is not present. As it stands right now rental income is excluded from self-employment (SE) tax if the renter is not considered a real estate dealer.
In the CCA, there is two rental situations to illustrate who would be charged SE tax and who wouldn’t. In both examples the individuals are not consider real estate dealers.
Example 1: An individual owns a residential home and rents it on Airbnb that is fully habitable for each occupant. They provide everything needed for the occupant to stay at the property. They also provide other services like daily maid service, prepaid vouchers for ride-share and a dedicated WI-FI service for the property. The taxpayer also materially participates in activity. Based on what is provided and how much the taxpayer participates, they would need to calculate SE tax.
Example 2: The taxpayer owns and rents a fully furnished room and bathroom in a dwelling. The occupants only have access to the common areas of the home to enter and exit the room and bathroom. The taxpayer will clean the bathroom and room in between each occupant’s stay. In this situation the taxpayer is not subject to SE tax because they did not provide substantial services beyond those required to maintain the space in a condition suitable for occupancy.
In these examples, the IRS is stating it doesn’t matter whether the taxpayer is a real estate dealer or not, but that the tax treatment depends on the services offered. Self-Employment tax can be applied even if it is a passive activity.
The CCA reflects the IRS’ perspective on the issue and helps taxpayers be on the lookout for changes in tax code and laws. If you have any questions, please reach out to one of our trusted advisors.
