SSR 85-18: SECTION 211(a) (42 U.S.C. 411(a)) NET EARNINGS FROM SELF-EMPLOYMENT -- RENTALS FROM REAL ESTATE -- SERVICES TO TENANT
20 CFR 404.1082(d)
- If a person owns tenant-occupied rental property, the income derived from it may be includable, under certain circumstances, in determining the person's net earnings from self-employment, even though he or she is not a real estate dealer. In determining whether the income is includable, the services provided by the property owner must be evaluated. The factors that must be considered in making the evaluation are discussed in the illustrative examples below.
Section 211(a) of the Social Security Act (the Act) provides, in pertinent part, that -- "The term 'net earnings from self-employment' means the gross income . . . derived by an individual from any trade or business carried on by such individual, less the deductions . . . attributable to such trade or business . . . except that in computing such gross income and deductions . . . (1) There shall be excluded rentals from real estate . . . unless such rentals are received in the course of a trade or business as a real estate dealer. . . ."
The Senate Report accompanying the Social Security Amendments of 1950 (S. Rept. No. 1669, 81st Cong. 2d Sess. (1950), U.S. Code Cong. Serv. p. 3454) reflects the intent of Congress with respect to the meaning of "rentals from real estate" as that term pertains to payments which are statutorily excluded from the definition of "net earnings from self-employment." Pertinent excerpts from the report read as follows:
- "Payments for the use or occupancy of entire private residences or living units in duplex or multiple-housing units are generally rentals from real estate. Except in the case of real-estate dealers, such payments are excluded . . . even though in part attributable to personal property furnished under the lease. On the other hand, payments for the use or occupancy of rooms or other space where services are also rendered to the occupant, such as for the use or occupancy of rooms or other quarters in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, or for the use or occupancy of space in parking lots, warehouses, or storage garages do not constitute rentals from real estate."
Section 404.1082(d) of Social Security Administration Regulations No. 4, 20 CFR 404.1082(d), provides criteria pertaining to rental income from living quarters. Subparagraphs (1) and (2) of this section provide, in pertinent part, as follows:
- "(1) No services provided for occupants. Payments you receive for renting living quarters in a private residence, duplex, or multiple-housing unit are generally rental income from real estate. Except in the case of real estate dealers, these payments are excluded in determining net earnings from self-employment, even if the payments are in part attributable to personal property furnished under the lease.
- Services provided for occupants. (i) Payments you receive for renting living quarters where services are also provided to the occupant, as in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, are included in determining your net earnings from self-employment. Any payments you receive for the use of space in parking lots, warehouses, or storage garages are also included in determining your net earnings from self-employment.
- (ii) Generally, we consider services to be provided to the occupant if they are primarily for the occupant's convenience and are other than those usually provided in connection with the rental of rooms or other space for occupancy only. We consider the supplying of maid service to be a service provided to the occupant. However, we do not consider the furnishing of heat and light, the cleaning of public entrances, exits, stairways, and lobbies and the collection of trash, as services provided to the occupant."
In Delno v. Celebrezze, 347 F.2d 159 (9th Cir. 1965), which involved the rental of apartment units, the court held that only payments for the use of space and for services required to maintain space in condition for occupancy were to be excluded in determining net earnings from self-employment. The court further held that the rental exclusion from self-employment income for Social Security purposes was intended to be narrowly restricted to payments for occupancy only and that any services not clearly required to maintain property in condition for occupancy should be considered as services performed for the tenant and not for conservation of invested capital. The court suggested that supplying linens and towels, cleaning apartments, emptying wastebaskets, providing laundry service, and cleaning and servicing the swimming pool were services other than those required for the maintenance of the property.
The evaluation of services provided by owners of tenant-occupied properties turns upon the facts in each individual case. The issue to be decided is whether the services provided by the property owner are for the convenience of the tenants or whether they are required to maintain the space rented to the tenants in condition for occupancy. If the services are determined to be for the convenience of the tenants, it is then necessary to determine whether the compensation for these services constitutes a material portion of the rental payments made by the tenants. If it does, the services are substantial and the income received by the property owners is "net earnings from self-employment" under section 211(a) of the Act. If the services rendered are not substantial, the payments are "rentals from real estate" and are excluded in computing net earnings from self-employment unless received in the course of a trade or business as a real estate dealer.
The following examples, illustrate how payments made by tenants to property owners, under varying circumstances, are treated for purposes of determining net earnings from self-employment.
- Example 1. The owner of a single apartment building consisting of 40 unfurnished units provides the essential utility hookups, maintains the grounds, cleans the public entrance and stairways, furnishes coin-operated washers and dryers in the basement, and provides trash dumpsters. The tenants pay for their own heat and electricity. The owner furnishes water because the local water board will not provide meters for individual apartments. The owner is not a real estate dealer.
The above example is a classic example of minimal services normally provided to apartment renters. The laundry facility is the only service which could be considered as provided for the convenience of the tenants. Under these facts, the service is not of such a substantial nature as to constitute a material part of the payments made by the tenants. Therefore, the income received by the owner is "rentals from real estate" and is not includable in computing "net earnings from self-employment" under section 211(a)(1) of the Act.
Taking the same facts as in Example 1 and adding additional services provided for the convenience of the tenants can change the character of the rental payments. For example, by providing a swimming pool, tennis courts, saunas, jacuzzies, cable TV hookups, recreation and meeting rooms with facilities for movies, card games, pool and table tennis, and once a week apartment cleaning service, the services become substantial in nature so that compensation for them constitutes a material part of the payments made by the tenants. The income received by the owner is then includable in computing "net earnings from self-employment."
- Example 2. A trailer park owner and operator provides trailer lots, services, and facilities to trailer owners for a monthly fee. The park owner allots a parcel of land for each trailer and maintains a laundry facility, city sewerage and electrical hookups, and a roadway into the trailer park. The owner cleans and maintains the grounds. The trailer owners maintain shower, toilet, and water heating facilities inside their trailers and pay for their own water and electricity.
Most of the services provided in this example are those required to maintain the property in condition for occupancy. While the laundry facility is a service for the convenience of the tenants, compensation for it alone would not constitute a material part of the payments made by the tenants. Therefore, the payments received by the trailer park owner are "rentals from real estate" and are not includable in computing "net earnings from self-employment" unless received in the course of a trade or business as a real estate dealer.
- Example 3. The trailer park owner and operator provides the same facilities and services as in Example 2. In addition, the owner provides and maintains a recreation hall, consisting of a card area, pool room, and kitchen. Employees of the owner supervise and maintain these areas. The owner also sponsors numerous recreational events, distributes a monthly newsletter to the tenants, and helps the tenants buy or sell their trailers. Employees of the owner will also connect and disconnect water, sewerage, and electrical lines for the trailer owners.
In this example, the owner clearly provides many services beyond those required for occupancy. These services are of a substantial nature and constitute a material part of the payments made by the tenants. The income received by the trailer park owner is thus includable in computing net earnings from self-employment.