Income and Assets · Income

Personal property rental

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

Rent is gross income (IRC § 61(a)(5)), so the money is never in doubt. What is in doubt is where it goes on the return, and that is decided by two questions asked in order: is the rental activity a business, and if not, is it carried on for profit? The three answers lead to three different places, with different deductions, a different exposure to self-employment tax, and — since 2018, and now permanently — a third route on which the expenses simply vanish.

The rule

Income first, characterisation second. Rents are enumerated in the definition of gross income (IRC § 61(a)(5)), and none of what follows changes that. The characterisation decides deductions and employment tax, never inclusion.

Business. Where the primary purpose is income or profit and the taxpayer is involved with continuity and regularity, the rental activity is a business, and income and expenses are reported on a business schedule (Publication 525, Rents From Personal Property). Expenses are then ordinary business deductions arriving at adjusted gross income through IRC § 62(a)(1).

For profit but not a business. Deductions for expenses paid for the production or collection of income, or for the management or conservation of property held for the production of income, are allowed by IRC § 212. Where they are attributable to property held for the production of rents or royalties, IRC § 62(a)(4) puts them above the line — so a taxpayer who lets equipment for profit without carrying on a business still deducts the expenses in arriving at adjusted gross income, not as an itemized deduction. Publication 525 maps this to Schedule 1: the income on one line, the expenses on another as an adjustment.

Not for profit. IRC § 183(a) disallows any deduction attributable to an activity not engaged in for profit except as the section provides. What it provides is two tiers: deductions allowable regardless of any profit motive (IRC § 183(b)(1)), and other deductions only to the extent gross income from the activity exceeds the first tier (IRC § 183(b)(2)). The activity is presumed to be for profit if gross income exceeded deductions in a specified number of recent years, subject to the Secretary establishing otherwise (IRC § 183(d)).

The second tier is now empty. The deductions IRC § 183(b)(2) would allow are miscellaneous itemized deductions, and no miscellaneous itemized deduction is allowed for any taxable year beginning after 31 December 2017 (IRC § 67(h)). So the practical position is starker than § 183 alone suggests: a not-for-profit rental produces income in full with no offsetting deduction for the expenses of earning it.

Self-employment tax is where personal property differs from real property. In computing net earnings from self-employment there are excluded rentals from real estate and from personal property leased with the real estate, together with the deductions attributable to them (IRC § 1402(a)(1)). Personal property let on its own is outside that exclusion. So a taxpayer in the business of renting equipment pays self-employment tax on the profit, where a landlord letting a house does not.

Current figures

Item	2026
Self-employment exclusion for rentals	self-employment income excludes rentals from real estate and from personal property leased with the real estate — personal property let on its own is not excluded^TY2026
Profit presumption	gross income exceeding deductions in 3 or more of the 5 consecutive taxable years ending with the current year, or 2 of 7 where the activity consists in major part of breeding, training, showing or racing horses^TY2026
Miscellaneous itemized deductions	no miscellaneous itemized deduction is allowed for any taxable year beginning after 31 December 2017 — permanent since the 2026 end date was struck, and now at IRC § 67(h) rather than § 67(g)^TY2026

How it works in practice

Settle the two questions before touching a figure, because everything else follows from them and nothing in the client’s records answers them. Continuity and regularity is the business test, and it is about the pattern of activity rather than the amount earned: a person who lets a trailer to a succession of strangers all year is likelier to be in business than one who lets a far more valuable machine to a single neighbour once.

Where the activity is for profit but not a business, resist the instinct to put the expenses on a business schedule. The reporting route is different, and it matters twice over — the income is not subject to self-employment tax, and putting it on a business schedule invites the Service to treat it as though it were.

Where the activity is not for profit, say plainly what the consequence is. Clients hear “hobby” as a softening; it is the opposite. The income is taxed in full and the expenses are gone, which is worse than either alternative. That makes the § 183(d) presumption worth understanding as a planning tool rather than a technicality — an activity with a genuine profit motive that has been loss-making should be documented as such while the facts are fresh.

One recurring documentation point: where the client rents both premises and equipment, find out whether the equipment is leased with the real estate or under a separate arrangement. The self-employment consequence turns on that, and the answer is usually in the lease rather than in the accounts.

The equipment let, and the house let

Sofia owns a small warehouse she lets to a fabrication business for $2,400 a month, and separately lets a forklift to a different, unrelated business for $700 a month. She treats both as rental income and assumes neither is subject to self-employment tax.

The warehouse is right. IRC § 1402(a)(1) excludes rentals from real estate, together with the attributable deductions, from net earnings from self-employment. The forklift is not. The exclusion extends to personal property only where it is leased with the real estate, and hers is let to a different tenant under a separate arrangement.

So if the forklift activity amounts to a business — a question of continuity and regularity, which a year-round lease with maintenance obligations suggests — the profit on it bears self-employment tax. Had the same forklift been leased to the warehouse tenant as part of the warehouse lease, the exclusion would have covered it.

The classic car that never made money

Bo owns a restored car he lets out for weddings a few times a year. He receives $3,100 and spends $5,200 on insurance, storage and restoration. The activity has lost money in each of the last four years and he keeps no separate accounts.

He reports the $3,100 in full. Whether he deducts anything depends on the profit motive, and four consecutive loss years mean the IRC § 183(d) presumption is unavailable to him — he would have to establish the motive on the facts, and casual record-keeping is evidence against it.

If the activity is not for profit, the outcome is the harsh one. IRC § 183(b)(1) still allows deductions allowable regardless of motive, but the rest fall under § 183(b)(2) as miscellaneous itemized deductions, and IRC § 67(h) disallows those entirely. The $5,200 produces nothing. He is worse off than if he had never let the car at all.

For profit, but not a business

Renata lets a specialised piece of surveying equipment to a former colleague under a twelve-month agreement for $9,000. She does nothing else with it, does not advertise, and has no other rental activity. Her costs — insurance, calibration and depreciation — come to $3,400.

This is for profit but probably not a business: there is a genuine profit motive but no continuity or regularity, one counterparty and no holding out to the market. So the income goes on Schedule 1 rather than a business schedule.

The expenses are not stranded. IRC § 212 allows deductions for expenses for the production of income, and IRC § 62(a)(4) puts deductions attributable to property held for the production of rents above the line — so the $3,400 reduces adjusted gross income even though she does not itemize. And because the activity is not a trade or business, the $5,600 of profit bears no self-employment tax.

Traps

The rent is income in every case. Characterisation decides deductions and employment tax, never inclusion (IRC § 61(a)(5)).
“Hobby” is the worst outcome, not the mildest. IRC § 183(b)(2) deductions are miscellaneous itemized deductions, and IRC § 67(h) disallows them, so the income is taxed with nothing against it.
The suspension is permanent and has moved. Pub. L. 119-21 § 70110(a) struck its 2026 end date and § 70110(b)(2) redesignated it from § 67(g) to § 67(h) — so a source citing § 67(g) for the suspension is now citing the definition of educator expenses instead.
Publication 525 still says these deductions “can be taken only if you itemize.” That condition can no longer be satisfied, so read it as a description of the pre-2018 rule rather than a route.
For-profit non-business rental expenses are above the line (IRC § 62(a)(4) with § 212), not itemized — a common and costly misfiling.
Personal property rental is not exempt from self-employment tax. IRC § 1402(a)(1) reaches personal property only when leased with the real estate.
The profit presumption is a presumption, not a test. Failing it does not make an activity a hobby; it only removes the shortcut, and the Secretary may rebut it even where it is met.
The horse rule is different — a shorter run of profitable years within a longer window (IRC § 183(d)).
A business schedule is not a safe default. Using one where the activity is not a business exposes otherwise-exempt profit to self-employment tax.

How this has changed

The change that matters here is not in § 183 or § 1402, both of which are long-settled, but in what § 183(b)(2) can still deliver.

Pub. L. 119-21 § 70110(a) struck the end date from the suspension of miscellaneous itemized deductions, substituting “beginning after 2017” for “2018 through 2025” in the heading and removing ”, and before January 1, 2026” from the text. The suspension is now permanent. Anything written on the assumption that hobby expenses return in 2026 is wrong, and that assumption was widespread while the sunset stood.

The same section moved the provision. Section 70110(b)(2) redesignated subsection (g) as (h), and § 70110(b)(1) added a new § 67(b)(13) for educator expenses with a new § 67(g) defining them. The practical consequence is a citation trap: a very large body of material cites ”§ 67(g)” for the suspension of miscellaneous itemized deductions, and § 67(g) is now about something else entirely. The proposition is unchanged and the address is not.

Publication 525 has not caught up with the consequence. Its treatment of an activity not engaged in for profit still says the limited deductions “can be taken only if you itemize deductions on Schedule A” — literally true, but describing a door that has been closed since 2018 and is now closed permanently. It is a good example of guidance that is accurate on its own terms and misleading in effect.

Exam focus

Know the two questions in order — business, then for profit — and what each answer produces. Expect a question that gives facts about continuity and regularity and asks where the income is reported.

Know that IRC § 1402(a)(1) excludes rentals from real estate and personal property leased with it, and that personal property let alone is therefore inside self-employment income. This is the distinguishing feature of the topic.

Know the § 183 two-tier structure and, more importantly, that the second tier is now empty because of § 67(h). A question asking what a hobbyist may deduct is asking about that interaction.

Know the profit presumption’s counts, including the different rule for horse activities, and be able to say that it is a presumption the Secretary may rebut rather than a definition.

Check yourself

1. A taxpayer in the business of renting construction equipment nets $40,000. Is the profit subject to self-employment tax?

Answer: yes. IRC § 1402(a)(1) excludes from net earnings from self-employment only rentals from real estate and from personal property leased with the real estate. Construction equipment let on its own is outside the exclusion, so a rental business in personal property produces net earnings from self-employment in the ordinary way.

2. A taxpayer lets a boat occasionally, without profit motive, receiving $2,000 and spending $3,500. What is deductible?

Answer: nothing beyond deductions allowable regardless of profit motive. IRC § 183(b)(1) preserves those; the rest fall under § 183(b)(2), which would allow them only to the extent income exceeds the first tier — and they are miscellaneous itemized deductions, which IRC § 67(h) disallows for any taxable year beginning after 31 December 2017. The $2,000 is taxed with effectively nothing against it.

3. Why is it wrong to report a for-profit but non-business equipment rental on a business schedule?

Answer: because it mischaracterises the activity in a way that costs money. A trade or business produces net earnings from self-employment; a non-business activity held for the production of income does not. The expenses are not lost by reporting correctly — IRC § 212 allows them and IRC § 62(a)(4) places deductions attributable to property held for the production of rents above the line — so the correct route gives the same deduction without the employment tax.

4. A source states that hobby expenses become deductible again from 2026 under IRC § 67(g). What is wrong with it?

Answer: both halves. Pub. L. 119-21 § 70110(a) struck the 2026 end date, so the suspension of miscellaneous itemized deductions is permanent rather than expiring. And § 70110(b)(2) redesignated the suspension as IRC § 67(h), while a new § 67(g) now defines educator expenses for the purposes of § 67(b)(13). The citation and the conclusion are each out of date.

Change log

2026-08-19Initial draft. Records the permanent suspension of miscellaneous itemized deductions and its redesignation from IRC § 67(g) to § 67(h) by Pub. L. 119-21 § 70110, and its effect on the deductions IRC § 183(b)(2) would otherwise allow.