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)

SSR 85-18

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:

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:

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

rom 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.

ot 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.

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."

ble 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."

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.

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.