SSR 62-48. NET EARNINGS FROM SELF-EMPLOYMENT -- RENTALS FROM REAL ESTATE

A licensed real estate broker received fees for the negotiation of leases and the collection of rent from properties of which he was a joint owner. He deducted these fees from the rents he collected and then distributed the remainder to the owners, including himself, in proportion to their ownership interests. In computing his net earnings from self-employment, he included the total amount of these fees and excluded as rentals from real estate only his proportionate share of the remainder of the rents collected. Held, that part of the income reported as fees from these properties proportionate to his ownership interest in them is rentals from real estate and must be excluded in computing his net earnings from self-employment. Further, his expenses attributable to these rentals from real estate are not deductible in computing his net earnings from self-employment.

R, a licensed real estate broker, filed application for old-age insurance benefits in May 1961 and became entitled to benefits beginning that month. Park of R's income comes from fees for negotiating leases and collecting rent for properties held for investment, in which he owns a one-half interest. The other one-half interest in these properties is owned by various members of R's family. The net rentals from these properties for 1960 amounted to $80,000, before deduction of $8,000 as R's fees for negotiating the leases and collecting the rents. The remaining $72,000 was then divided among the owners (including R), according to their respective ownership interests. Of this amount R's share was $36,000 as one-half owner of the properties.

R reported net earnings from self-employment of $4,500 for 1960, based on gross income of $10,000 and business expenses of $4,400. These two latter amounts include $8,000 in fees and $4,400 for expenses, respectively, attributable to properties in which he had an ownership interest. R did not include $36,000 rental income from these properties in computing his net earnings from self-employment.

The question is whether R was correct in including in his net earnings from self-employment for 1960 the income and expenses attributable to his activities in connection with the properties in which he has an ownership interest. The amount of R's net earnings for 1960 will affect the amount of hid old-age insurance benefit since the amount of an individual's old-age insurance benefit is based on his average monthly earnings.

Section 211(a) of the Act provides, in pertinent part, that in computing net earnings from self-employment --

(1) There shall be excluded rentals from real estate and from personal property leased with real estate * * *, together with the deductions attributable thereto, unless such rentals are received in the course of a trade or business as a real estate dealer; * * *.

Regulations No. 4, ยง 404.1052(a) provides, as pertinent here, as follows:

(1) * * * In General, an individual who is engaged in the business of selling real estate to customers with a view to the gains and profits that may be derived from such sales is a real estate dealer. On the other hand, an individual who merely holds real estate for investment or speculation and receives rentals therefrom is not considered a real estate dealer. Where a real estate dealer holds real estate for investment or speculation in addition to real estate held for sale to customers in the ordinary course of his trade or business as a real estate dealer, only the rentals from real estate held for sale to customers in the ordinary course of his trade or business as a real estate dealer, and the deductions attributable thereto, are included in determining net earnings from self-employment; the rentals from the real estate held for investment or speculation, and the deductions attributable thereto, are excluded.

A real estate broker acts as an agent for a commission or fee in buying, selling, and renting properties owned by others; his income from these activities is included in determining his net earnings from self-employment. On the other hand, a real estate broker who personally owns real estate for investment or speculation and receives rentals therefrom is not considered to be acting in the capacity of a broker with respect to the properties which he owns; and his income from such properties is excluded as rentals from real estate in determining his net earnings from self-employment.

In the present case, since the properties jointly owned by R and his relatives were held for investment, R's share of the rentals from these properties as rentals from real estate and must be excluded in computing his net earnings from self-employment. The total net rent from the properties before deduction of the $8,000 in fees is $80,000, of which R's share as one-half owner is $40,000. Therefore, besides the $36,000 which R did exclude in computing his net earnings from self-employment, he must also exclude one-half of the $8,000 he reported as fees, or $4,000, since this amount also represents part of his proportionate share in the rentals derived from properties he personally holds for investment. However, the remaining $4,000 in fees is for services in connection with that part of the properties held by his relatives and represents income derived by R in the course of his trade or business as a broker. Thus, the $10,000 reported as gross earnings from self-employment must be reduced by the $4,000 of rentals from real estate, which R included as fees from servicing his own property, leaving $6,000 as gross earnings for 1960.

Expenses attributable to excluded rentals from real estate are not deductible in computing net earnings from self-employment. It is, therefore, necessary to exclude R's expenses in acquiring such rentals. Since R owned one-half of the properties and had expenses of $4,400 attributable to such properties, his expenses must be reduced by an amount proportionate to his ownership interest in the properties. The expenses pertaining to the rentals are $2,200 (50% of $4,400). R's total business expenses are, therefore, $3,300 rather than $5,500 as reported.

Accordingly, it is held that R's net earnings from self-employment for 1960 ar $2,700 ($6,000 gross earnings minus $3,300 expenses).


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