Self Employment Tax

[Gene C]

Are partners subject to self employment tax on their share of a partnership that has only investment income including an installment gain from a real property sale and interest income on a note from the purchaser? The partnership is not considered a "trade or business". Its' income is reported as investment income on the form 1065 and K-1 forms.

[IRonMaN]

Investment income isn't subject to SE tax.

[sjrcpa]

Is there anything on the K-1 14A?

[Gene C]

No, I am preparing the partnership return and haven't yet entered anything in 14A. I know that, as a general rule, general partners are subject to self-employment tax on a partnership's trade or business income, but in this case the partnership only had an investment in real estate that it sold in an installment sale and collected interest along with the profit on the R.E. Anything that I've read about self-employment tax on partnerships only refers to "trade or business" income of the partnership. Nothing mentioned about partnerships with only investment income and gains therefrom.                                                                      Thanks for your input.

[Gene C]

Even in the context of a partnership arrangement? In their guidance on this subject, the IRS doesn't appear to distinguish partnerships that are only investment vehicles from those that operate as a trade or business. 

Thanks very much for your reply!

[sjrcpa]

Self-employment income would usually be found on K-1 Line 1 ordinary income and Guaranteed Payments.

Doesn't sound like you have those.

[sjrcpa · Accepted solution]

There's a worksheet for computing self-employment income in the 1065 instructions. Does it help?

[TaxGuyBill]

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@Gene C wrote:

 but in this case the partnership only had an investment in real estate that it sold in an installment sale and collected interest along with the profit on the R.E.

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An Installment Sale of real estate results in capital gains and interest.

So you are asking if SE tax applies to capital gains and interest?  The answer to that is "no".

[Gene C]

That definitely helped answer the question.

Thanks for pointing that out.

[sjrcpa]

You're welcome.