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Management Salary

I own rental properties and...

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?

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Answered in 15 minutes by:
8/28/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,164
Experience: Taxes, Immigration, Labor Relations
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Lev :

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.

Customer:

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?

Lev :

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.

Customer:

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?

Lev :

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.

Customer:

Okay, so I understand that I can not pay myself a management fee and report the salary as income on Schedule C.

Lev :

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.

Lev :

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.

Customer:

Thank you!

Lev
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