New Sources Of Revenue 2 - Rentals From Real Estate

New Sources Of Revenue 2 - Rentals From Real Estate

A second source of new revenue that the BEST Social Security Modernization Plan proposes to infuse additional funding into the Social Security trust fund is rental income from real estate.

Under current law rental income is taxable if one of three conditions is met: https://secure.ssa.gov/apps10/poms.nsf/lnx/0301803600 . The second of these three conditions is when “personal services” are provided as part of the rental agreement. These are defined here: https://secure.ssa.gov/apps10/poms.nsf/lnx/0301803624 .

I feel that those who rent real estate are working by way of their financial investment, their diligence, and their vigilance, in not only protecting their investment, but also in their quest to earn money via their investment. The current exception is admittedly rather arbitrary and all rentals should be subject to paying the SECA tax.

In fact, working and earning money via investments and rentals of real estate has become a very trendy way of working and earning a living, perhaps precisely because of the current Social Security tax exemption loophole.

Here are two articles which discuss “rents,” the best thing (?) since sliced bread: http://www.opednews.com/articles/1/Rent-is-50-of-a-Nation-s-by-Fred-Harrison-Money_National-Debt_Reform_Taxes-131124-761.html , and  http://www.alternet.org/economy/tomdispatch-laura-gottesdiener-wall-streets-rental-empire?paging=off&current_page=1#bookmark .

Now once the law is changed to remove the exception to Social Security coverage rentals from real estate is it a fairly straightforward process to collect the tax from the self-employed: http://www.irs.gov/taxtopics/tc554.html . However, if even the same individual is incorporated how do we collect the “compulsory” Social Security tax? In fact, has Social Security been collecting the compulsory tax from those landlords who have been performing personal services if those landlords are incorporated? I do not think so. While a corporation may require an employee to be paid a salary, the additional net income from real estate rentals should also be subject to the FICA/SECA tax.

This is why I want a seat at the table when Social Security is reformed. I propose that net earnings from rentals from real estate be subject to the 12.4 per cent Social Security tax. This tax should be compulsory and the monies should be credited to the Social Security trust fund. The 12.4% could be a deduction from corporate earning subject to income taxes, but it should not reduce the net earnings from real estate. If the landlords pass on the SECA tax to renters, then the added pass along amount will increase the net rental income thereby causing a further increase to the amount of Social Security taxes payable.

This newly proposed Social Security tax differs from currently existing taxes as the money paid into the Social Security trust fund will not be credited to any individual, but it will boost Social Security trust fund solvency. Keep in mind that Social Security is a social insurance program where shared contributions proved retirement, survivor, and disability insurance to all participants. It is not that unlike the situation of am unmarried worker, without children or dependent parents, who works and pays into the trust fund right up to her/his untimely death before age 62. No benefits ever are paid to anyone on this worker’s account. Yet, her/his contributions served to keep the program solvent.

However, if we can all agree that earning from real estate should be subject to Social Security taxation, then we should be able to collect that tax regardless of whether these earnings are from the self-employed or a corporate structure.

In addition to being a new source of revenue for the Social Security trust fund, there is another reason why making rental income and stock market gains and capital gains subject to Social Security taxation will make the trust fund solvent: persons or corporations generally receive these types of income for longer periods of time than the typical worker. Monthly Social Security retirement benefits are calculated by using the worker’s highest 35 years of earnings after they are indexed for inflation. A typical worker might have 40 years where they pay into the Social Security trust funds. Thus Social Security collects Social Security taxes for an extra 5 years which do not affect the worker’s benefits at all. This benefits the trust fund. The worker who has rental income, stock market gains, or capital gains may have, for example, 55 years of creditable earnings. Yet, only 35 years affect the worker’s benefits. In this case rather than having an extra 5 years to boost the trust funds, there will be 20 years of additional tax receipts to keep Social Security solvent.

Update: Some may wonder, what about the old venerable owner-occupied duplex? I’m not in favor of modernizing Social Security by adding exceptions to coverage. However, a realistic compromise might be to exclude owner-occupied rental income for duplexes only, beginning with the year in which the owner reaches full retirement age, which is currently age 66 but is scheduled to top out at age 67 in the future.