Personal property includes equipment, vehicles, furniture—anything used in a business that is not real property or a real property fixture.
Personal property rentals are treated differently from real property rentals for tax purposes.
Tax Treatment of Personal Property Rentals
The tax treatment of personal property rentals by individuals depends on how the activity is classified—and there are three possibilities:
Business
For-profit activity
Not-for-profit activity
Business
If your primary purpose is earning income or profit and you’re involved in the rental activity with continuity and regularity, your rental activity is a business.2 You don’t have to work at a business full time, but it can’t be a sporadic activity.
If personal property rentals are a business, the income generated and the expenses incurred are reported on IRS Form 1040, Schedule C, Profit or Loss from Business.3 The rental income is subject to self-employment tax, like any other proprietorship income. This differs from real estate rental income, which is not subject to self-employment tax.
Example. Jason is a freelance crew member in the film and television production industry, operating as a sole proprietor. About 45 percent of his income comes from his labor, and the other 55 percent comes from renting his equipment to the production companies that hire him. Jason’s rental activity clearly constitutes a business. He reports his rental income on Schedule C, subject to self-employment tax (Social Security and Medicare tax).
For-Profit Activity
For-profit activities are engaged in to earn money but don’t rise to the level of a business. Income from a rental for-profit activity is reported as “other income” on Form 1040, Schedule 1, line 8l. Expenses from the activity are reported on Schedule 1, line 24b as an “above the line” adjustment to income. Since the activity is not a business, there is no self-employment tax.
Example. Dansby owns a vintage car that he rents to film production companies two or three times a year. The activity is engaged in for profit but is too sporadic to constitute a business. He reports his income and expenses on Form 1040, Schedule 1. He pays no self-employment tax on this rental income.
Not-for-Profit Activity
Personal property rentals are a not-for-profit activity (also called a “hobby”) if they are engaged in primarily for reasons other than earning a profit—for example, for recreation or pleasure, or as a sport.
Expenses from a not-for-profit activity are not deductible during 2018-2025.6 Starting in 2026, unless the law is changed, such expenses will be deductible up to the amount of hobby income as a personal itemized deduction on IRS Schedule A to the extent they exceed 2 percent of the taxpayer’s adjusted gross income.
You report income from not-for-profit activities on Form 1040, Schedule 1, line 8j. The income is not subject to self-employment tax.
Example. Lisa is an avid angler and owns a fishing boat. Every year she rents her fishing boat to her brother-in-law, charging him only enough to cover the cost of the gas. This is clearly a not-for-profit activity. Lisa can’t deduct her expenses and reports the income on Schedule 1.
Renting Personal Property to Your Business
If your business is organized as a sole proprietorship or a single member LLC taxed as a sole proprietorship, you and your business are a single taxable entity. Rentals between the business and you are ignored: it’s like taking money out of one pocket and placing it in the other—there’s no taxable event.
If your business is a corporation, a partnership, or a multi-member LLC, renting personal property to the business is a taxable event. If the business is a pass-through entity (S corporation, partnership, or multi-member LLC), the business deducts the rental expenses, and that reduces your income from the business.
You report the rental income on your Form 1040 and deduct depreciation and other expenses. Myriad tax rules can apply, as we discuss below.
C Corporation
Such rentals can be beneficial if your business is a C corporation, which is a separate taxpaying entity. C corporation earnings are taxed first as income to the corporation and then again as they are distributed as dividends to the shareholders.
If you receive corporate profits in the form of rent rather than distributions, the corporation can deduct the rental expenses. The rent payments are taxed only once, as income to you.
Example. Mark is the sole shareholder and an employee of ABC, Inc., a C corporation that owns and operates a dry-cleaning business. Mark personally owns the dry-cleaning equipment used by the business. He rents the equipment to the corporation, which pays him a fair rental amount each month. This income is taxed only once: when Mark receives it. ABC, Inc., deducts the rental payments as a business expense.
Of course, employee-shareholders can also take money out of their C corporation in the form of employee salary. Salary is not taxed twice, because the corporation can deduct it. But payroll taxes (Social Security and Medicare tax) must always be paid on employee salary.
Self-Employment Taxes
Personal property rental income is not subject to self-employment tax (Social Security or Medicare tax) if the rental activity is a for-profit activity. The income and expenses are reported on Schedule 1, and no self-employment tax need be paid.
But the rental income will be subject to self-employment tax if the activity rises to the level of a business rather than a for-profit activity, and then it must be reported on Schedule C.
Rental Business?
Whether rental of equipment or other personal property is a business or a for-profit activity is a fact-specific determination. Factors to be considered include whether the lessor
If you rent property to your business, you should draft and sign a formal lease agreement and be paid a commercially reasonable rental amount. Transactions between related parties typically come under close scrutiny by the IRS. If the IRS finds the rent paid by the corporation unreasonable, the IRS can recharacterize the rent as a distribution of profits.
Self-Rental Rule
The “self-rental” rule applies to rental of personal property to a business in which you materially participate. The rule works like this:9
Key point. Self-rental gives you the worst of both worlds—passive classifications.
Grouping
You can avoid the self-rental rules with the grouping election. You may group your personal property rental with your business when the group forms an appropriate economic unit and
Caution 1. The tax code prohibits grouping real and personal property rentals.
Exception. If you rent the business building or office unit to your business and such rental includes furnished offices, the prohibition on combining activities does not apply, and you can group with the business activity under the grouping rules stated above.
Caution 2. The self-rental grouping benefit does not work for a C corporation.
Takeaways
Here are four takeaways from this article.
