Common Ownership = No Hours Required!

Published on: 16:08PM Jan 21, 2019

We had a reader send in the following comment:

"It sounds like bringing a rental to the level of trade or business (the 250 hours) would make it subject to SE tax in all cases except the common control scenario? Specifically, we have land held outside the operating entities, either by individuals or separate pass-through entities, primarily to protect the land but also to reduce SE tax. (I am in the 8th district.) Do you think that qualifying the rental entities income as QBI, via common ownership, now makes that rental/pass-through income subject to SE tax? "

The quick answer is no. It is not subject to SE tax. The common ownership rules trump the safe harbor rules. If your farm operation pays rent to you or a pass-through entity, then no hours are required related to the rental income. By default, this income qualifies as QBI (unless it is being paid by a C corporation).

We will continue to want to have a lease calling for no landlord participation and paying fair market value leases. By having this lease, you will continue to have the income be QBI and more importantly, none of the rental income will be subject to self-employment tax.

The only time you ever need to look at the safe harbor rules is if you are not receiving rent from an entity that is part of the common group. Then you either meet the safe harbor rules or are able to argue that it rises to the level of a trade or business.

The bottom line - If you receive rent as part of a common group, no hours are required and you get QBI for all of that rental income even if one or more of the owners do not have ownership in the farm tenant.