Tax Question - Passive Real Estate Investment Income

[Frederick Hawkins]

Hey BP,

Looking at starting an LLC to manage future investment properties. Anyone have experience operating an LLC and not having to pay self-employment taxes? Here's my understanding of the IRS code on this question:

The self-employment tax (15.3%) does not apply to passive income that LLC owners earn from rental activities, unless you are a real estate professional, even if you materially participated in the property.

Thanks in advance.

[Scott Crowley]

@Frederick Hawkins This is a good question, but the way you worded your first sentence could mean completely different things.

What I am confident you are asking in this question(correct me if I am wrong) is that you are wanting to know if you will have to pay SE taxes on PASSIVE income for investment properties HELD in an LLC. If that's the case, you will NOT be subject to SE taxes as investment property, whether held in your personal name or in an LLC, is recognized by the IRS as passive income, which is not subject to this tax.

You are only subject to SE tax for any type of business in which you are actively participating/operating to generate revenue. Basically, think of it as two sides: The 'Active' side is the business/operational side(things like flipping, contractor business, window washing business, etc). Then, think of the other side as the 'Passive' activities/investments, in which is solely for HOLDING ASSETS, that ideally are generating a return(buy & hold real estate, IRA's, 401K's, investment accounts, etc).

Hope this helps!