1.9 DO NOT OVERTAX RENT INCOME: While it is Ordinary Income, Rent Income is not Subject to Social Security taxes.
That is, rents for the use of property are not subject to self-employment (social security) taxes. IRC 1402 (a)(1). This is so regardless of the number of rentals that are owned.
ALERT: I have seen numerous times – CPA’s erroneously classify rent income for the use of the property as self-employment (social security) income – causing the investor to pay about another 15% of the income in taxes. Ouch! For seven years this happened to one of my students with their self-storage facilities. When they realized the CPA’s blunder, they could only go back three years to amend the return to recoup the past paid taxes. It was too late for the prior four years of $10,000 in taxes!
NOTE: There are many deductions that can substantially lower rent income and even create a “paper” tax loss; see next.
1.10 WHEN PURCHASING YOUR NEXT RENTAL PROPERTY ALTER WHO PAYS FOR VARIOUS EXPENSES ON THE HUD-1 TO SAVE YOU TAX DOLLARS!
While it is customary for the seller to pay for all real estate commissions out of the proceeds her or she receives, there is no reason why you can’t alter the sales price so that the net proceeds to the seller is the same ye the buyer can take the expense of paying the commissions and therefore the tax benefit.
The result is the same to the seller including the effect on their taxes. Furthermore, you can alter who pays the transfer tax and accomplish the same the same thing, which is the seller, gets the same net proceeds and has no negative impact on the capital gains tax or income tax they pay and yet the buyer gets the full tax right off.
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