Kansas City Earnings Tax on Rental Income

[Marko13]

I'm a retiree living on soc sec and savings and I have a rental in KCMO and live in KCMO.

Also a couple rentals outside of KCMO.

Everything I can find about KC earnings tax on rental income (Eg RD-100) talks about BUSINESS owning rentals, not an individual. 

Examples exist that suggest that many rentals are investment not earned income. 

I'm not an LLC, I don't have a business license, don't fill out a Sched C on federal etc. 

I can't find any definitive documentation that pertains to my case (and many others I suspect)

Would appreciate any clarification you might have.

[Carl]

What I can tell you (and confirm) is that long term residential rental real estate is reported on SCH E as a part of your personal 1040 tax return. The income is passive. (Sch C income is non-passive, so you would not be reporting your rental income on SCH C at all.)

[Marko13]

That's correct regarding federal.

The murky area is with Kansas City MO taxing businesses getting rental income. I've seen examples(i'm trying to find them again for citation) of a person hiring a prop mgr to do everything and then it's passive, versus them making all the decisions, selecting tenants, approving repairs etc. they start to consider it your "employment" and thus taxable....

here is some verbiage from KCMO (seems to apply to business not individual???)

examples from the Earnings and Profits Tax Regulations
Of the City of Kansas City, Missouri
Sections §1.381 to §1.402 Inclusive

(V) The term “income producing activity” applies to each separate
item of income and means the transactions and activity directly
engaged in by the taxpayer in the ***regular course of its trade or
business for the ultimate purpose of obtaining gains or profit***. ...

 Accordingly, “income producing activity”
includes, but is not limited to the following:
...
(b) The sale, rental, leasing, licensing, or other use of real property.

----- and also

Gross receipts derived from business within the city, and included in
the numerator of the gross receipts factor, shall be the amount of gross
receipts determined as follows:
(I) Rents and royalties for the use of property. Gross receipts derived
from rents, royalties or other charges for fees derived from the use
of property that are subject to this tax under the provisions of these
regulations shall be considered to be gross receipts from within
Kansas City, Missouri as follows:
(a) Gross receipts from the sale, lease, or rental of real property are
in Kansas City, Missouri if the real property is located in
Kansas City, Missouri.

[Marko13]

found the other information

from: https://www.kcmo.gov/city-hall/departments/finance/tax-home/tax-guide-for-rental-businesses

• Rental income is subject to the earnings tax to the extent that the rental, ownership, management, or operation of the property from which the income is derived constitutes a business activity of the taxpayer in whole or in part. Factors to consider that determine taxability of the activity include:

• A legal entity was created to hold (or manage) the property.
• The income is generated from activity in the regular course of the taxpayer’s trade or business; for example, a real estate business.

Other factors that may be used to determine whether the income is the result of a business activity or “hands-off” in nature include:

• The amount of personal involvement by the taxpayer, including the taxpayer’s employees or agents. This includes the extent to which the taxpayer participates in management decisions, such as advertising a property, vetting or approving tenants, deciding on rental terms, approving expenditures and similar decisions.
• The frequency and number of transactions that produced the income.
• The amount of time and attention the taxpayer devotes to rental operations during the year.
• The proportion of the income relative to the taxpayer’s other earnings or income.

The following are some examples to assist with determining the taxation of rental income: 

1. Jim Taxpayer bought his first home in Kansas City, Missouri after he was offered a job as an engineer with a local firm. After several years, he purchases another home in Kansas City, Missouri where he continues to be employed full-time as an engineer. Jim does not sell the previous property but instead chooses to rent it out as he does not believe he can recoup its value through a sale. Jim does not set up a legal entity to hold or manage the property and participates in all management decisions including selection of the tenant, lease terms, and such things as arranging to have the lawn mowed. He does not own any other rental property and intends to sell the property as soon as he believes it can be sold for a price that will allow him to recover its value. Jim’s rental income would not be considered earned as the activity is not in the regular course of his business and therefore does not constitute a business activity.
   
   
2. Joan Taxpayer operates a sole proprietorship that buys old buildings and residences, refurbishes them, and resells them. She also sometimes rents out such buildings and does not use a management company. Joan’s rental income is subject to tax because it is incidental to her business and she is active in its management.
   
   
3. Joe Taxpayer bought land in Kansas City, Missouri, and built a 200-unit apartment building, Riverfront Rentals. When Joe Taxpayer died in 2019, his grandchildren, John and Jane Taxpayer, who are both teachers, inherited the land and building. Having no experience with operating an apartment building and no time to devote to it, John and Jane entered into a management agreement with James Smith, a realtor with extensive experience in managing residential rental property. Under the agreement, John and Jane will pay Smith 20 percent of the rental income, and Smith will oversee the day-to-day operation of the building and make all of the management decisions, including selection of tenants, lease terms, and approving building expenditures. Smith devotes a considerable amount of time to managing Riverfront Rentals. Because Smith is engaged in a business activity, his share of the rental income would be earned and subject to the tax. The rental income of John and Jane Taxpayer would not be considered earned.
   
   
4. John and Jane Smith are siblings. They form a limited liability company (LLC) to purchase a fourplex in Kansas City, Missouri. They rent out the fourplex. Both John and Jane have full-time jobs. They employ a leasing agent to list available units, but ultimately approve tenants. They also contract with a company to have all maintenance performed, including regular upkeep and lawn mowing, but approve larger expenditures, such as replacement of HVAC systems, etc. John and Jane’s rental income is subject to the tax because the LLC was set up to own rental property, is generating income from its ordinary operations, and the taxpayer is active in management decisions of the LLC.

• All net profits from rental real estate business activities of a sole proprietor who is a resident of Kansas City, Missouri are subject to tax, regardless of the location of property or properties.

So, again, the printed information all refers to businesses and the first example above of Jim the engineer seems to be closest to mine but it makes a point that he only owns one rental but does not say what would change for him if he owned more than one, or wasn't working as an engineer eg me being retired...???

for me the most problematic is the phrase "The proportion of the income relative to the taxpayer’s other earnings or income." but it doesn't say what that proportion is.