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Rental Income: Rental Income as Sole Source of Earnings –
Real Estate Trade or Business
Henrietta’s sole livelihood is derived from owning and operating commercial buildings. Tus, these assets
are treated as business property and not as investment property. Her income stream is outlined below.
Te tax applies as follows:
Gross Rents
(Including depreciation and debt service)
Net Rents
(Net rental income)
Excess of AGI over $200,000
Lesser Amount
(No investment income)
Tax Due
Henrietta’s rental income is from a trade or business so it is NOT treated as investment income.
Tus, she is NOT subject to the 3.8% investment income tax.
The health care bill created a separate tax for high wage and self-employment
business income. Thus, Henrietta IS subject to the new 0.9% (0.009) tax on earned
income, because some portion of the net rents represents her compensation for
operating the commercial buildings. See additional background below.
For this example, assume that the total net rents are her sole compensation. The tax
on this earned income would be as follows:
Excess of AGI over $200,000
Tax Due
($30,000 x .009)
Depending on how Henrietta has organized her business (S Corp, LLC or sole propri-
etor), she might be able, for example, to pay herself $175,000, leaving the remaining
$55,000 in the business in anticipation of making improvements the following year.
In that case, because her AGI of $175,000 is less than $200,000, she will owe neither
the unearned income tax (3.8%) nor the earned income tax (0.9%).
Example 5