Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/128835
For real estate professionals to avoid the Medicare surtax on net rental income, they must not only materially participate in the operation of their properties (so that it is not a passive activity), but their operation of the properties must constitute a trade or business. Grouping all rental activities owned or managed into one activity can eliminate the passive activity characterization of the income. It can also be benefcial in demonstrating that the aggregated activities constitute a trade or business. Triple Net Challenges However, the issue is not entirely clear. Some commentators suggest that material participation in managing properties, even where those properties are owned, does not cause them to be engaged in a trade or business. The determination of what constitutes a trade or business may fall under IRC Section 162 and other established standards. Tose commentators suggest that management of properties subject to triple net leases may not constitute a trade or business and that such leases should be changed so that the landlord actively performs or is responsible for the performance of necessary services under the lease. Te Medicare surtax also may not apply to "self-rented" property. When certain criteria are met, owner-users may be able to elect to group the rental activity with their business activity to form an "appropriate economic unit" within the context of IRC Section 469. Tis grouping can cause the rental income to escape characterization as passive income subject to the Medicare surtax. Again, however, it appears that the IRS may take the position that the rental income is still subject to the Medicare surtax, because it is not derived in the course of a trade or business. As noted above, some commentators are recommending that leases for self-rented property not be triple net leases and that the landlord actively perform or be responsible for the performance of the services necessary under the lease. Owner-operators and other professionals in the real estate industry must now meet several tests to substantiate that they are actively involved in a trade or business and are not subject to either the passive activity loss limitations or the Medicare surtax on net investment income. It is more important than ever to review all real estate activities, evaluate the degree of participation in them, and consider how they relate to one another. Hopefully, guidance will be forthcoming before the fling deadlines for 2013 tax returns. In the meantime, individuals earning income generated from rental real estate activities should consult their tax advisers to begin planning how to minimize the impact of the Medicare surtax on their 2013 income. William F. Becker Jr., CPA, is a tax partner in the Tampa, Fla., office of Cherry Bekaert LLP. Contact him at bbecker@cbh.com. J. Bradley Campbell, CPA, is the managing partner of the South Carolina Upstate office. Contact him at bcampbell@cbh.com. Log on for the latest CCIM member benefit National Virtual Deal Making Session CCIM Designees present property listings to CCIM members and prospective buyers in a free webinar. TUEJUNE 4TH — Industrial TUEOCTOBER 1ST — Land TUEAUGUST 6TH — Retail TUEDECEMBER 3RD — All properties Don't let this exclusive opportunity pass you by. Register for the JUNE 4TH session today. Visit ccimdealmaking.com for more information. Registration will close the day prior to the session at 12 p.m. Central. CCIM.com May | June | 2013 17