SI 00830: Unearned Income
TN 79 (12-98)
Citations:
Social Security Act as amended, Section 1612(a)(2)(F);
20 CFR 416.1121(d)
A. Policy
1. Definitions
Rent is a payment which an individual receives for the use of real or personal property, such as land, housing or machinery.
Net rental income is gross rent less the ordinary and necessary expenses paid in the same taxable year.
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Ordinary and necessary expenses are those necessary for the production or collection of rental income. In general, these expenses include:
interest on debts;
State and local taxes on real and personal property and on motor fuel;
general sales taxes; and
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expenses of managing or maintaining property.
(See SI 00830.505A.11. below for a more specific list.)
2. Depreciation not deductible
Depreciation or depletion of property is not a deductible expense.
3. When to deduct expenses
We deduct expenses when paid, not when incurred.
4. Earned or unearned income
Net rental income is unearned income unless it is earned income from self-employment (e.g., someone who is in the business of renting properties).
5. Rental deposits
Rental deposits are not income to the landlord while subject to return to the tenant. Rental deposits used to pay rental expenses become income to the landlord at the point of use.
6. Rent/Expenses prior to eligibility
In determining net rental income, we do not consider rents received or expenses paid in months prior to SSI eligibility.
7. Rent/Expenses in suspense months
In determining net rental income, we consider rents received or expenses paid in a month in which the case is in suspense status as if the case had been in pay status.
8. Multiple family residence
In multiple family residence:
If the units in the building are of approximately equal size, we prorate allowable expenses based on the number of units designated for rent compared to the total number of units.
If the units are not of approximately equal size, we prorate allowable expenses based on the number of rooms in the rental units compared to the total number of rooms in the building. (The rooms do not have to be occupied.)
NOTE: Any expenses strictly related to a particular rental unit are deducted in total from the rent for that unit. Such expenses are not prorated.
9. Rooms in single residence
For rooms in a single residence:
We prorate allowable expenses based on the number of rooms designated for rent compared to the number of rooms in the house.
We do not count bathrooms as rooms in the house.
We count basements and attics only if they have been converted to living spaces (e.g., recreation rooms).
NOTE: Any expenses strictly related to a particular rental room are deducted in total from the rent for that room. Such expenses are not prorated.
10. Land
We prorate expenses based on the percentage of total acres that is for rent.
11. Deductible expenses
Example of deductible expenses:
Interest and escrow portions of a mortgage payment (at the point the payment is made to the mortgage holder);
real estate insurance
repairs (i.e., minor correction to an existing structure);
property taxes;
lawn care;
snow removal;
advertising for tenants; and
utilities.
12. Nondeductible expenses
Examples of nondeductible expenses:
principle portion of a mortgage payment; and
capital expenditures (i.e., an expense for an addition or increase in the value of property which is subject to depreciation for income tax purposes).
B. Procedures
1. Evidence
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Use documents in the individual's possession (e.g., bills, receipts, etc.) to verify the gross rent and the dates received, and the expenses and the dates paid.
NOTE: The individual's most recent Federal tax return including Schedule E will be helpful in identifying past expenses and in estimating future rental income.
If no documents are available, obtain a statement either signed or recorded on a DROC explaining why no documents are available and providing an allegation of the gross rent and expenses paid for the period involved. Do not contact the tenants to verify the allegation.
If you are uncertain whether an expense is allowable (e.g., whether it is an incidental repair or a capital expenditure), contact the local Internal Revenue Service (IRS) or refer to IRS Publication 527. Document the file with the information obtained from IRS.
2. Computation
Determine gross rent received and deductible expenses month - by - month.
Subtract deductible expenses paid in a month from gross rent received in the same month.
If deductible expenses exceed gross rent in a month, subtract the excess expenses from the next month's gross rent and continue doing this as necessary until the end of the tax year in which the expense is paid.
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If these are still excess expenses after applying b. above, subtract them from the gross rent received in the month prior to the month the expenses were paid and continue doing this as necessary to the beginning of the tax year involved.
NOTE: Do not carry excess expenses over to other tax years nor use them to offset other income.
3. Documenting calculations
Document the proration of allowable expenses and the calculation of net rental income by using the worksheet in E. below or on another form (e.g., an RC or by using the Net Rental Income Program website.
4. Joint owners
Absent evidence to the contrary, apportion net rental income equally among owners. (A statement either signed or recorded on a DROC can be acceptable evidence if it reasonably explains why apportionment is not equal.)
If the gross rent is split between two joint owners before expenses are paid, deduct expenses paid by the SSI recipient from his/her portion of the gross rent.
5. Future rental income
Use evidence from the retroactive period to estimate net rental income for the next 14 months; however, deduct only predictable expenses, (e.g., utilities, interest payments, taxes, etc.)
If an unpredictable expense is reported at a later date (e.g., a repair), deduct it in the month paid. If the expense exceeds the rent for that month, recalculate the rest of the estimated period as necessary (see 2.b. above).
6. Interest
Use an individual's amortization schedule to determine interest determine expenses.
If a schedule is not available, divide the yearly interest by twelve to determine monthly interest.
7. Refunds on paid expenses
If the SSI recipient receives a refund for an expense already paid (e.g., a property tax refund), recalculate his/her net rental income for the period involved.
C. Example
1. Proration of room rental expenses
Mr. Joshua Steele, an SSI recipient, rents out a room in his house to a cousin. The house has six rooms excluding the bathroom. Since Mr. Steele's expense (interest on a mortgage, utilities, etc.) are for the whole house, only one-sixth of the expenses is deducted from the gross rent.
2. Rental income interrupted
Mrs. Anna Minnick, an SSI recipient, owns a multiple family residence and rents out half of it. In 9/89, her tenants leave and she receives no gross rent until 11/89 when new tenants move in. Mrs. Minnick continues to pay mortgage and utilities on the residence during 9/89 and 10/89. The claims representative determines that Mrs. Minnick has excess expenses and no rental income for 9/89 and 10/89 because she receives no gross rent for those months. The excess expenses are carried over into the calculation of net rental income for 11/89.
3. Gross Rent - Two owners but only one owner pays expenses
Mrs. Kate Henning, an SSI recipient, owns her home jointly with her son, John. Mrs. Henning rents out a couple of rooms in her house for $350/month and gives her son half of it ($175/month). Mrs. Henning pays all the rental expenses herself. To calculate Mrs. Henning's net rental income, deduct the allowable expenses she pays (prorated, if necessary) from $175 (her portion of the gross rent).
D. References
Property essential to self-support, SI 01130.500.
In-kind support and maintenance in households with room rentals, SI 00835.470.
Rounding of income, SI 02001.010.
Net earnings from self-employment, SI 00820.200.
E. Exhibit - Rental income worksheet
