My husband and I own a real estate rental LLC. Self employment earnings on the K-1 do not include our guaranteed payments for services provided. Is this correct?

[cherylcov]

We use turbo tax business to prepare the K-1 and list ourselves as real estate professionals.  Since the payments are not being added into our self employment earnings we are not  paying self employment tax on them.  

[AmandaR1 · Accepted solution]

It depends, real estate activity is normally passive, but you are correct to check it. A few things to consider:

• Guaranteed payments should be reported on your schedule K-1 line 4 Guaranteed Payments (if your schedule k-1 doesn't have this line, check the top left to make sure your schedule K-1 says (1065) below it) 
• The IRS has a different version of real estate professional, which is not met by simply being a real estate professional. Only when you meet the IRS qualifications for real estate professional and you materially participate in each rental, will your activity be reported as active self-employment, instead of passive. To be a real estate professional:
  
• More than one-half of all personal services the taxpayer performs in trades or businesses during the tax year are in real property trades or businesses in which the taxpayer materially participates, and  
• The hours spent providing personal services in real property trades or businesses in which the taxpayer materially participates total more than 750 during the tax year.
  

You may recall answering these type of real estate questions in the software. If you didn't meet these thresholds then that is why it is not flowing as self-employment.

If this doesn't resolve your question, please provide more info based on these details. 

[cherylcov]

Thank you.  Yes we both pass all of the real estate professional guidelines and materially participate.  That's why I don't understand turbo tax not adding the guaranteed payment into our SE earnings.  Any suggestions?

[AmandaR1]

You are most welcome. If you look at your schedule K-1, do you see your payments in box 4 and 14?

[cherylcov]

The payments are in box 4.  There is an amount in box 14, but it is ordinary business income not from rentals.