Discussion:Income from rental of personal property

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Income from rental of personal property

Dcrane (talk|edits) said:

18 January 2006
My recollection is that a few years back, rules changed that made it disadvantageous for a corporation or partnership to rent personal property (e.g., equipment, vehicles, etc.) from a shareholder/partner. I have been researching this question today and can't seem to find anything concrete. I did find a reference at irs.gov saying that rental of real estate is reported on schedule E, and rental of personal property is reported on schedule C, but I don't trust the IRS to give an unbiased opinion.

One other thing I found on Kleinrock referenced the instructions for schedule E as follows:

"... the rental of personal property is considered a business if the primary purpose of renting the property, such as equipment or vehicles, is income or profit, and the taxpayer is involved in the activity with continuity and regularity."

So here's the fact pattern: my client (a new client this year) is starting a machine shop. The business itself will be conducted in an LLC owned equally by him and his wife, but his attorney suggested keeping the production equipment in his name personally and renting it to the business. The attorney's objective is to keep the equipment out of the reach of creditors if things go sour. If he takes this approach, is the net rental income from the equipment rental treated as self-employment income?

Anything you can do to point me in the right direction, including code or reg cites, would be very helpful. Thank you.

Riley2 (talk|edits) said:

18 January 2006
If the rental activity does not rise to the level of a trade or business, report the activity as a PPR (personal property rental) on page 1 of the 1040. There is a line instruction for PPR's, and no SE tax would apply since there is no trade or business.

TGilliam (talk|edits) said:

21 January 2006
In my state TX, the rental of personal property is often subject to sales taxes, another good reason not to rent PP.

Scot1 (talk|edits) said:

21 January 2006
Riley2 - where are deductions related to the income reported, such as depreciation, repairs, etc?

Solomon (talk|edits) said:

21 January 2006
Report on line 36 of 1040 with same notation as income on line 21 - PPR.

ConservativeDC (talk|edits) said:

23 January 2006
Be careful, though. Any rental activity that is not a for-profit business, nor coming under the 25k real property exception, is a passive activity. As such, you cannot take a loss, but must rather carry losses forward to future tax years.

Also, you need to depreciate whatever equipment is being rented. It sounds like this equipment would be depreciated over 7 years, so you'll have to choose the method you want.

If you're thinking about moving over to the Schedule C just to take a loss, think again--you need to make a profit in 3 out of 5 tax years in order to avoid having the activity reconstituted as a hobby and having all of your losses disallowed.

The best way to manage this is to have the PPR rental income equal the expected deductions. Evening things out in this way should allow you to claim the full tax advantage.

Riley2 (talk|edits) said:

23 January 2006
The PPR activity may show a loss as long as the Sec. 183 rules don't apply. If the Sec. 183 rules apply, all deductions must be reported on Sch. A and are limited to the amount of gross income from the PPR activity.

To join in on this discussion, you must first log in.
Personal tools