New Tax Law: 20% of Qualifying Business Income Deduction

[Christopher Smith]

Has anyone found any authoritative sources that indicate the 20% QBI deduction under the new tax act applies specifically to rental real estate properties that are considered as Passive Activities under current law? 

The new provision clearly includes rental real estate (whether or not in an entity), but the language requiring that the income be effectively connected to a US Trade or Business is potentially ambiguous. Passive rental real estate activities do not necessarily qualify as a Trade or Business activity for various provisions of the tax law - so clarification here would be really helpful.

[Michael Plaks]

@Christopher Smith

Welcome to the tax law! :)  It is worse than you think. First, the answer to your question is not spelled out in the new bill. We tax pros mostly agree that the law implies the definition of trade and business under Section 162 of the code. 

Why is that important? Because trade and business has been mentioned in many sections of the tax code, with different language and NO actual practical definition. It has been the source of endless confusion and litigation for decades.  

Assuming that we interpret the law correctly, and Section 162 applies, then most passive RE investments should qualify. Don't ask me to clarify "most." I can't, and I don't believe anybody can, as of today. By the way, the term "passive" also has multiple definitions in the tax law, depending on the specific provision!

We expect multiple clarifications of the new law in the coming months: a "Technical corrections" bill from Congress, Federal Regulations from the Dept of Treasury, numerous interpretations by the IRS and eventually litigation. The details will keep changing for awhile.

As of now, my advice (and I believe most of my colleagues would agree) is to treat all passive investments as eligible for 20% until we're specifically told otherwise by the regulators.

To improve your chances, you may want to increase the level of your personal participation - and document it.