Rental management as earned income?

If you both own the property I see no way that her bookkeeping or management activities could be clasified as earned income.

Had you told me you were the sole owner of the property and you hired your wife as property manager/bookkeeper, and you issue her a W-2, I might buy that.

No. It all goes on Schedule E as rental income. And if you were able to do so, the self-employment tax would pretty much eat up all the income tax benefits of the retirement contribution. It might be possible to set up a corporation to do the management, and your wife could be its employee, but again, the cost of another tax entity, and payroll taxes, probably eat up any potential benefit.

Sounds like you may have to use Schedule C to report your rental income. See the quote from publication 527 below.

Note that since your income is self-employment, it is subject to the

15.3% social security and medicare tax. You do earn SS credits though.

There's some talk about husband-wife joint ventures. This might apply to you.

Schedule C (Form 1040)

Generally, Schedule C is used when you materially participate in your residential rental activity. Providing substantial services. If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C, Profit or Loss From Business, or Schedule C-EZ, Net Profit From Business. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For information, see Publication 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. For a discussion of ?substantial services,? see Real Estate Rents in Publication 334, chapter 5.

Qualified joint venture. If you and your spouse each materially participate (see Material participation on page 13) as the only members of a jointly owned and operated rental real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership.

If you make this election, instead of filing Schedule E or Form

1065, you and your spouse must each file a separate Schedule C or C-EZ reporting the appropriate share of income and deductions. Rental real estate income generally is not included in net earnings from self- employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status and using the Schedule C or C-EZ does not alter the application of the self-employment tax or the passive loss limitation rules.

However, the answer could be quite different in a Community Property state.

Part of your post mentions " . . . for university students or visiting fellows . . .". Many students provide their own furniture when living on campus, but when my daughter was in college she rented a furnished apartment and the landlady provided cleaning services.

IF (and that's a big IF) you provided a furnished apartment and you also provide services such as cleaning, laundry, meals, linens and such then what you have may actually rise to the level of a real trade or business similar to a hotel. IF (another big IF) this is the case then the activity does NOT belong on Schedule E as a rental but instead belongs on Schedule C as a trade or business, in which case YES the net income would qualify as EARNED and you would be able to use it to make IRA contributions. Of course, you'd also be subject to Self Employment Tax, so be wary of that.

I will caution you that trying to convert an otherwise passive activity such as a rental property into a trade or business is NOT something you should try to do without professional help. If you do it wrong you could find yourself with a TRUE Section 469 Passive Activity. This ALSO goes on Schedule C BUT you get to deduct losses ONLY to the extent you have OTHER passive income, which most people don't have.

I'm guessing from your post that you and your wife are both retired and have no jobs other than these rentals. If YOU (alone) had other income, from a job, you could use THAT income to make a IRA contribution for your wife, even though she may have no income of her own and even if YOU participate in a retirement plan at work.

Hope this helps, Gene E. Utterback, EA, RFC, ABA

Thanks for all the replies on this. I'll take

as a representative answer, and pretty strong indicator that even trying to do this is best avoided.