Is passive rental income subject to Self Employment Tax

[Yas Tahir]

I am a passive real estate investor (no full time job) and own a few rental properties tru my LLCs. I just noticed that I pay Self Employment Tax on the total amount of net income? My return is prepared by my CPA. Is this correct? I will also start flipping and I am aware that that will be subject to capital gains. My questions:

1. Is rental income subject to SE tax?

2. Is capital gains also subject to SE tax?

[Brian Schmelzlen]

Yas,

I am a CPA and tax attorney in California. If your CPA is advising you to dissolve your LLC and instead own rental real estate through a corporation (C or S), he is giving you very bad advice. Go find another CPA immediately bad.

Moving property out of a Corp is a taxable event, while it isn’t necessarily for an LLC, so that’s not a good thing.

Also, if you are a S corporation if you want to take money out of the Corp you must first pay yourself a reasonable salary (and pay payroll taxes on that).

If you are a C corporation, you are subject to double taxation (all income is taxed at the corporate level, and then again when distributed to you).

If you are a real estate developer it makes sense to own property through a corporation, but not rental real estate.

I strongly suggest talking to someone else about you tax situation.