Does Rental Income Reduce Social Security Benefits?

Does Rental Income Reduce Social Security Benefits?

AS with squirrels storing away acorns for the winter, Social Security reflects a primal instinct in the modern world. Putting something away for the future is, at any rate, an act of common sense. Yet the 1929 stock market crash brought home the vulnerability of pensions and other investments targeted to help us fund goals throughout our lives. The Social Security Act of 1935 sought to address this hazard through a government program into which workers would pay and from which retirees would collect. While tweaked over the decades, the principle remains. Still, there are some qualifications to how much is returned, namely rental income.

Revenue from Real Estate

Although markets ebb and flow, real estate is perceived as a sound investment. Many choose to wholesale and renovate properties, selling them at a higher price to turn a profit. Others might invest in tax lien certificates. Yet a large number of people seek to acquire and hold a property, renting it out for additional income. It might be a single-family residence; it might be an apartment building. Whatever the subject property, money from tenants can be a lucrative business or simply a modest financial cushion to provide a little added security.

The Basics of Being a Landlord

Of course, maintaining a rental property goes far beyond buying a unit and letting the money roll in. As with the houses we live in, things break in rental units. They are subject to the weather and the elements, and they are subject to taxation. You must also think about local ordinances. In addition, the house or apartment is also subject to irresponsible and unfortunate tenants whose monthly remittances are less than consistent. All of this goes to say that owning property also costs money so revenues from rents might be more modest than expected.

What Does This Have to Do with Social Security?

It is a widespread belief that, because we pay into Social Security with a lifetime of wage-earning, the benefit should be neither modified nor curtailed in any way. However, according to the Social Security Administration’s website, the purpose of this system is:

  • “To provide for the material needs of individuals and families.”
  • “To protect aged and disabled persons against the expenses of illnesses that may otherwise use up their savings.”
  • “To keep families together.”
  • “To give children the chance to grow up healthy and secure.”

So, Social Security is designed primarily as a safety net. It might follow that the benefit paid out will reflect the degree of perceived need.

How Is the Social Security Payment Calculated?

Still, Social Security is also a contract between the government and the working citizen, a contract without pre-conditions if monies are annually collected from payroll or self-employment taxes. In the strictest sense, then, rental revenues do not figure into what the Social Security Administration (SSA) pays to a retiree. Just how does the SSA determine the monthly outlay to an individual?

1. The SSA sums up the compensation earned over the recipient’s working years.

2. Those earnings are indexed per changes in average remuneration since the recipient last worked.

3. Focusing on the 35 years where earnings were at their peak, the government applies a calculation that yields the “primary insurance amount” or PIA. 

4. This amount is diminished if a person chooses to collect before the age of 65.

5. The PIA is augmented if benefit collection is delayed past age 65.

Thus, the monthly payment is unaffected by whether or not the recipient receives income from landlording — at least as far as the SSA is concerned.

The Tax Man Taketh

That, nevertheless, is not the end of it. As a rule, Social Security is a benefit accrued through taxation so it is not subject to the income tax if you begin collecting at 65. Like all rules, however, it has exceptions. When recipients exceed certain total income thresholds, the social security revenue becomes vulnerable to some taxation — from $25,000 for individual filers and $32,000 for joint filers. Therefore, it is the Internal Revenue Service that reduces the Social Security benefit, not the SSA.

Seek Wise Counsel

As with all matters of taxation and finances, there are exceptions to the exceptions. Property owners do well to consult experienced professionals.