Have a Tax Question? Ask a Tax Expert
I own rental properties and the rental income is reported on Schedule E. I am also a real estate broker and report my commissions for real estate sales on Schedule C. Can I pay myself a management salary for managing my own properties? I would deduct the income from Schedule E and report it on Schedule C. I understand that I would have to pay social security tax on the management salary since it will be reported on Schedule C. However, I want to increase my Schedule C earnings so I can contribute more to a Solo 401K. Is this acceptable with the IRS?
Hi and welcome to Just Answer!As long as the rental activity is a passive activity - there is NO "management salary."However - because you are a real estate and if that is not a passive rental activity - then - all income and expenses are reported on schedule C.If you simply switch income from passive activity to non passive - by paying yourself wages - that is not acceptable.
I meet the required number of hours so my losses are not limited. Are you telling me that I should be reporting all of my schedule E income on schedule C?
As a general rule - rental activity is a passive activity.However - if you are a real estate professional and rental IS your business - that should be reported on schedule C - not schedule E.In this case your net business income will be classified as earned income - subject of self-employment taxes and eligible for retirement plan contributions.
Commission sales of real estate are my "business". I was told my a IRS employee who was a customer that all my earnings from rental income should be reported on Schedule E. My commission sales are reported on Schedule C. Was the IRS employee wrong?
The IRS employee is correct - as long as you are running rental as not your business - but as a separate rental activity. While you you “materially participate” in your rental activity - seems as the IRS employee disagreed to classify it as a business activity and you were not able to proof otherwise.
Okay, so I understand that I can not pay myself a management fee and report the salary as income on Schedule C.
However - as long as that is a separated rental activity - and not your business - income you received is a rental income - and is NOT earned income.
You can NOT pay yourself a management fee - you may do that internally on your books - but that is not a deductible expense. So - from IRS prospective - that is not allowed.