QBI Deduction For Rental Property (A Helpful Example Activity Log)

The Qualified Business Income (QBI) deduction, (also called pass-through deduction, or section 199A deduction) was created by the 2017 Tax Cuts and Jobs Act (TCJA). With the QBI deduction, most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax.

Rental Real Estate as Passive Income IRS classifies Rental Real Estate as passive. This has several unfortunate implications. Any losses a landlord suffers in Real Estate cannot be offset against income you earn from job, stocks, etc.

Anyone who has ever been a landlord, can attest to the fact that real estate business is never passive. No matter what the IRS says!

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business for purposes of the QBI deduction, if certain criteria are met.

How To Apply QBI for Rental Property

1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. 2. 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.

3. 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.

4. The taxpayer attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon. Real estate rented under a triple net lease (NNN) in which the tenant pays for taxes, fees, insurance, and maintenance is not eligible for the safe harbor. Given that the landlord does not spend any time on such properties; this makes sense. Triple net leases are quite hands-off.

Why Section 199A Safe Harbor Provision Is Important For Real Estate

The Safe Harbor provision allows rental real estate to be treated as a trade or business for purposes of the qualified business income deduction under section 199A.

While there was a lot of confusion initially with respect to QBI deduction for rental property; the clarifications published by IRS have helped. However since this is still a new area make sure that your CPA has included the appropriate level of deductions in your tax returns. CPAs do make mistakes on your tax returns.

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