Is there any way rental income could be considered earned income?

[FiredUp321]

I get VA disability along with SSDI and therefore, have unearned income. Wife was working gigs like uber but didn't make as much as I thought she would and now I'm in trouble. She opened a roth and I opened a spousal roth under her and we setup automatic investments to max both. From what I understand you can only contribute dollar for dollar what you earned that year correct? So if my wife and i both contribute 6,500 we would need 13,000 in earned income for that year? If so and we didn't reach this threshold of earned income would I need to call vanguard about that? How do I fix it?

Also, we have two rental units that we rent with an annual contract. We've been considering renting through airbnb or vrbo etc for awhile now. Is there any way that doing that would allow the income to be considered earned income or is a rental alway going to be passive income? We could also start another business as I'm sure generating the 13,000 per year wouldn't be difficult to do. That way we could also start a solo 401k or if anyone has suggestions about any other avenues i'm unaware of other than taxable accounts. We are trying to put money away for retirement but with VA disability and SSDI and the rental income all being unearned income, that's tough.

[MDM]

Unfortunately, rental income is one of the specifically disallowed items under What Is Compensation?

[former player]

I don't know your specific tax system and you need to be very careful that you are not trying to evade tax in ways that would bring the fiery rains of the taxman down on you, but if you have records showing the hours of management time or other work (maintenance, cleaning?) that you have put into the rentals then you might be able to claim the equivalent of wages for that time as self-employed income.

If you've outsourced the management and other work then no.

And I can't caveat this advice too heavily: don't try to do anything the taxman isn't happy with.

[maizefolk]

That way to fix it is to reach out to your IRA provider and ask to either withdraw the excess contributions (there is a form to fill out for that) or apply them to this tax year rather than last tax year (also a form for that).

[SeattleCPA]

Also, we have two rental units that we rent with an annual contract. We've been considering renting through airbnb or vrbo etc for awhile now. Is there any way that doing that would allow the income to be considered earned income or is a rental alway going to be passive income?

The Section 469 statute and its companion regulations identify a number of situations where even though you're renting property as a key element of the business, the activity isn't considered rental activity. E.g., if you run a hotel or motel, you're renting rooms. But that's not a rental activity.

The gray area in my mind is whether something like a short-term rental works as Schedule C activity producing self-employment income or not. Some tax guys argue "yes." Some like me think. "yeah you need to be careful here."

I doubt this is a very fruitful line of thinking. One issue, you're probably overestimating the value of the Roth-IRA account. I won't bang that drum again. Another issue, if this gambit requires the assistance of a professional tax accountant, it's probably a nonstarter because with the shortages of people and especially talent, you won't find someone to help.

[seattlecyclone]

Also, we have two rental units that we rent with an annual contract. We've been considering renting through airbnb or vrbo etc for awhile now. Is there any way that doing that would allow the income to be considered earned income or is a rental alway going to be passive income?

The Section 469 statute and its companion regulations identify a number of situations where even though you're renting property as a key element of the business, the activity isn't considered rental activity. E.g., if you run a hotel or motel, you're renting rooms. But that's not a rental activity.

The gray area in my mind is whether something like a short-term rental works as Schedule C activity producing self-employment income or not. Some tax guys argue "yes." Some like me think. "yeah you need to be careful here."

Right. A hotel room is taxed differently from a studio apartment. At their core, both are pieces of real estate where customers pay money to sleep. What differentiates the two is largely the level of amenities offered. There's a continuum here. A typical apartment lease doesn't come with furniture or utilities included, though some do and these furnished apartments are still just apartments. Many short-term rentals are basically just furnished apartments. You don't get typical "motel" services such as a maid cleaning your room and replacing sheets periodically, continental breakfast included, a front desk where someone's available to help with various things, etc. The more of these services you do offer, the more reasonable it seems to claim that your activity is akin to a self-employed person running a traditional motel or bed & breakfast and should be taxed accordingly.

I doubt this is a very fruitful line of thinking. One issue, you're probably overestimating the value of the Roth-IRA account. I won't bang that drum again. Another issue, if this gambit requires the assistance of a professional tax accountant, it's probably a nonstarter because with the shortages of people and especially talent, you won't find someone to help.

Fair enough. I'd however expect that many people starting a short-term rental business would want to seek some professional help getting their taxes in order, at least at the beginning, regardless of whether they try to claim it as a Schedule C business or a Schedule E rental activity.

[SeattleCPA]

The more of these services you do offer, the more reasonable it seems to claim that your activity is akin to a self-employed person running a traditional motel or bed & breakfast and should be taxed accordingly.

Totally agree. BTW H&R Block has had a good little, er, write-up on how to distinguish between Schedule C and Schedule E.

Fair enough. I'd however expect that many people starting a short-term rental business would want to seek some professional help getting their taxes in order, at least at the beginning, regardless of whether they try to claim it as a Schedule C business or a Schedule E rental activity.

Good point. And the short-term rental business potentially provides tons of tax planning opportunities and at the same time comes with some huge complexity-related risks. I've always described Section 280A for example as a minefield. Recently a friend who runs a similarly-sized CPA firm corrected me, said, "No Steve, not a minefield... it's a machinegun nest."

But the tax accountant shortages are severe. I knew the IRS would not be able to hire anything like the numbers they hoped given the shortages. There just aren't people. But I admit I'm shocked that that recent inspector general report indicated they'd only been able to bring 34 people on board over a six month period and not the 3700 they'd planned.

P.S. Blog looks good!

[FiredUp321]

I figured. It seems risky even if you're doing it all right. I'd imagine there's a higher chance of getting audited.

[FiredUp321]

Also, we have two rental units that we rent with an annual contract. We've been considering renting through airbnb or vrbo etc for awhile now. Is there any way that doing that would allow the income to be considered earned income or is a rental alway going to be passive income?

The Section 469 statute and its companion regulations identify a number of situations where even though you're renting property as a key element of the business, the activity isn't considered rental activity. E.g., if you run a hotel or motel, you're renting rooms. But that's not a rental activity.

The gray area in my mind is whether something like a short-term rental works as Schedule C activity producing self-employment income or not. Some tax guys argue "yes." Some like me think. "yeah you need to be careful here."

Right. A hotel room is taxed differently from a studio apartment. At their core, both are pieces of real estate where customers pay money to sleep. What differentiates the two is largely the level of amenities offered. There's a continuum here. A typical apartment lease doesn't come with furniture or utilities included, though some do and these furnished apartments are still just apartments. Many short-term rentals are basically just furnished apartments. You don't get typical "motel" services such as a maid cleaning your room and replacing sheets periodically, continental breakfast included, a front desk where someone's available to help with various things, etc. The more of these services you do offer, the more reasonable it seems to claim that your activity is akin to a self-employed person running a traditional motel or bed & breakfast and should be taxed accordingly.

I doubt this is a very fruitful line of thinking. One issue, you're probably overestimating the value of the Roth-IRA account. I won't bang that drum again. Another issue, if this gambit requires the assistance of a professional tax accountant, it's probably a nonstarter because with the shortages of people and especially talent, you won't find someone to help.

Fair enough. I'd however expect that many people starting a short-term rental business would want to seek some professional help getting their taxes in order, at least at the beginning, regardless of whether they try to claim it as a Schedule C business or a Schedule E rental activity.

Overestimating the value of the roth, can you please elaborate?

[cchrissyy]

So if my wife and i both contribute 6,500 we would need 13,000 in earned income for that year? If so and we didn't reach this threshold of earned income would I need to call vanguard about that? How do I fix it?

is that true? or is one person earning 6500 enough for both of you to contribute?  honestly i don't remember the rules for couples but suggest you check this assumption.

re how ot fix this, you contact the custodian and ask for them to process a return of your excess contribution. that's the phrase you want. not a withdrawal, not a conversion.

[seattlecyclone]

Overestimating the value of the roth, can you please elaborate?

He has a recent blog post about this topic. I don't fully agree with it, but that's a post for another time.

[maizefolk]

So if my wife and i both contribute 6,500 we would need 13,000 in earned income for that year? If so and we didn't reach this threshold of earned income would I need to call vanguard about that? How do I fix it?

is that true? or is one person earning 6500 enough for both of you to contribute?  honestly i don't remember the rules for couples but suggest you check this assumption.

Yes, to fund a spousal IRA you need enough income to cover both the contributions in your own name and the contributions you're making on behalf of your spouse.

Edit: But there are enough weird tax loopholes and counterinituitive things that I agree, it makes sense to check things like this rather than go off of what would make logical sense.

[SeattleCPA]

Overestimating the value of the roth, can you please elaborate?

@FiredUp321  Here's a blog post I did about why backdoor Roths are almost always a bad financial idea: https://evergreensmallbusiness.com/backdoor-roth-iras-and-401ks-really-a-smart-idea/

Note that at the end of that point, links point to other posts that explain why for most people "frontdoor" Roths don't make sense either.