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Qualified Business Income (QBI) and Rental Owners: All You Need to Know

Over this past year, taxpayers and tax professionals have been steadily becoming acquainted with the Tax Cuts and Jobs Act (TCJA).  In particular, rental real estate activity has moved under the spotlight with the enactment of these new tax rules and treatments. The looming question remains:  Is a rental real estate activity considered a trade or business for new QBI deduction, or is it merely an investment?  Because the new QBI deduction is significant, formulation of the answer to this question must be considered correctly.

Safe Harbor Requirements

The Internal Revenue Service has recently announced a safe harbor for certain real estate interests that include mixed-use properties to be treated as a trade or business for the section 199A deduction.  A rental real estate enterprise is defined as an interest in real property held to generate rental or lease income, and it may consist of an interest in a single property or multiple properties. To start, according to IR-2019-158, there are specific requirements that must be met in order to claim safe harbor:

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
  • For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
  • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
  • The taxpayer or a relevant pass through entity (RPE) attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.

If the taxpayer does not qualify for the safe harbor there is still a possibility that the rental activity can qualify for the QBI deduction. In that scenario, the taxpayer will need to show that the rental activity rises to the standard of a Section 162 trade or business. This standard is based on facts and circumstances and can be a gray area that is difficult for taxpayers to navigate. 

Planning Considerations

Application of the QBI deduction is a relative new application and as such many times some tax practitioners lack the proper experience and guidance to get it right. This is especially true if you do not meet the safe harbor requirements of the QBI deduction for a rental activity. We are here to assist you with our familiarity with all tax rental activity rules and safe harbor requirements.  Dallo Law Group’s goal is to maximize tax benefits, proper reporting, and prudent future planning for your investments and income producing activities. We can also clear up all other areas of the TCJA provisions for you. Be sure to contact us with any questions or to set up a free consultation at any point and at your convenience: 619-795-8000