Qualified Business Income Deduction for Rental Property

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Qualified Business Income Deduction for Rental Property

Jose Hammer
Member since 2024 · 2 posts · 0 votes

I own 1 profitable rental property and I am retired, keep separate records on my rental property.

According to IRS guidance it states:  "If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations." (source)

It also states this:  

The following requirements must be met by taxpayers or RPEs to qualify for this 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 RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.


If I don't meet all the 4 bullet points for Safe Harbor am I still able to take the Qualified Business Income Deduction for a profitable Rental Property?

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  • Benjamin WeinhartBusiness Member
    Accountant · Cincinnati OH 45245, USA · Member since 2022 · 112 posts · 112 votes
    2y
    Quote from @Jose Hammer:

    I own 1 profitable rental property and I am retired, keep separate records on my rental property.

    According to IRS guidance it states:  "If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations." (source)

    It also states this:  

    The following requirements must be met by taxpayers or RPEs to qualify for this 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 RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.


    If I don't meet all the 4 bullet points for Safe Harbor am I still able to take the Qualified Business Income Deduction for a profitable Rental Property?

     Hi Jose, simply put, no. You must satisfy all 4 of those bullet points to take QBID for the year (the last one is easy). Also do keep in mind that unless it gets renewed, 2025 will be the last year that a taxpayer is able to take advantage of QBID as it was included as part of the TCJA from 2017. I would advise you to consult with your tax professional to see if you may be able to use some planning strategies to help you best take advantage of the deduction in 2024/25 in the event it isn't renewed by the next congress.

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  • Jose Hammer
    OP
    Member since 2024 · 2 posts · 0 votes
    2y
    Quote from @Benjamin Weinhart:
    Quote from @Jose Hammer:

    I own 1 profitable rental property and I am retired, keep separate records on my rental property.

    According to IRS guidance it states:  "If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations." (source)

    It also states this:  

    The following requirements must be met by taxpayers or RPEs to qualify for this 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 RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.


    If I don't meet all the 4 bullet points for Safe Harbor am I still able to take the Qualified Business Income Deduction for a profitable Rental Property?

     Hi Jose, simply put, no. You must satisfy all 4 of those bullet points to take QBID for the year (the last one is easy). Also do keep in mind that unless it gets renewed, 2025 will be the last year that a taxpayer is able to take advantage of QBID as it was included as part of the TCJA from 2017. I would advise you to consult with your tax professional to see if you may be able to use some planning strategies to help you best take advantage of the deduction in 2024/25 in the event it isn't renewed by the next congress.


     Thank you, the guidance is confusing in that it states you can still treat real estate as a trade or business if it does not meet the 4 bullet points for safe harbor.

    In my HR Block tax software there are two QBI options for rentals:  

    1) Treat rental under safe harbor rules or
    2) This rental is eligible for QBI without safe harbor. 

    The software guidance for QBI without safe harbor says the below which I meet all three in that I manage the property, it is profitable and in USA.  Wouldn't this qualify me for QBI on this rental?

    Rental Activity Eligible for the QBI Deduction

    Under the Tax Cuts and Jobs Act (TCJA) tax reform bill, you can deduct up to 20% of your qualified business income. To be considered a trade or business for the qualified business income deduction, all of these must be true:

    • Your participation in the rental activity must be regular, continuous, and substantial.
    • You conduct the rental activity with the expectation that you'll make a profit.
    • The rental activity is conducted in the United States or Puerto Rico.

    Rental activities that are considered trades or businesses include:

    • A real estate professional who materially participates in the activity
    • A rental to a commonly owned trade or business

    Rental activities that aren't considered trades or businesses include:

    • Rentals for less than fair market value (FMV)
    • A lease agreement in which the tenant pays for real estate taxes, insurance, and maintenance
    • A vacation home that's rented out and also used as a personal home
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  • Mike Richards
    San Angelo, TX · Member since 2016 · 21 posts · 2 votes
    1y

    And all these years later it is still clear as mud. Unless...

    Has anyone claimed the QBI without the Safe Harbor been audited?

    Did they tell the tax man to show him/her where it states that a single profitable rental house that an individual manages themselves but doesn't meet all the Safe Harbor rules doesn't qualify?

    Did they have to amend their return and pay interest and penalties?

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  • Stephen Nelson
    Accountant , CPA, MBA in Finance, MS in Taxation · Redmond, WA · Member since 2025 · 172 posts · 135 votes
    1y

    This is an old thread but as a hardcore Section 199A guy, I'd say the safe harbor is worthless. Good intentions on part of IRS. But it's not really practical.

    What you want to use is the Section 162 "trade or business standard" which is discussed in lots of detail in the Section 199A regulations. In a nutshell, the regulations say that if you're in real estate to make money and your activities show regularity and continuity? You're operating a Section 162 trade or business and you get the Section 199A deduction. (The IRS 8995 form instructions which you use to calculate the Section 199A deduction say basically the same thing only adding the descriptions "considerable" and "extensive".)

    FYI, my book about "Maximizing Section 199A Deductions" was purchased by thousands of CPA firms so their tax accountants could quickly learn how Section 199A worked. (I mention that not to promote the book. I mention that to provide context.)

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