If you’re a business owner, it often makes sense to rent from yourself, taking advantage of office or warehouse space you own. Your business pays rent to the owner—you—and deducts the rental payments as legitimate business expenses. And although you’re taxed on the rental income, you can offset some of that with expenses you incur. It’s a win-win situation.
However, a new tax provision that took effect for the 2013 tax year can throw a monkey wrench into the works. Under regulations the IRS recently issued, such “self-rental” income may be subject to a special 3.8% Medicare surtax.
The 3.8% Medicare surtax applies to the lesser of (1) net investment income (NII) or (2) the amount by which your modified adjusted gross income (MAGI) exceeds a threshold amount. That threshold is $200,000 for single filers and $250,000 for joint filers. Business landlords who have income from various sources easily can find themselves subject to the tax.
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