Tax Implications: When Is a Rental Property Counted as Qualified Business Income?

Tax Implications: When Is a Rental Property Counted as Qualified Business Income?

Blog Article

Rental property investing is a very popular method of building wealth, and one of the most effective methods qualified business income deduction for rental property. But not all rental activities can be considered a business. To be eligible for the deduction, landlords must demonstrate that their property is an enterprise or trade under IRS guidelines.

Here's a step-bystep guide for determining if your rental property can be eligible for this tax deduction.



Step 1: Understand the QBI Deduction Basics

The QBI deduction permits an exemption of 20% of net business earnings for qualified business-related activities. Though initially targeted towards sole proprietors and small business owners, rental real estate is also eligible if it's run as a commercial enterprise.



Step 2: Evaluate Your Rental Activity

Consider the following questions:

Do you regularly supervise or manage the property?

Are you responsible for the maintenance of your property, lease, or relations with tenants?

Do you keep organized financial record?

Is the property designed to generate long-term income?

If the answer is yes to a majority of these, your rental business could be considered a business.



Step 3: Consider the Safe Harbor Rule

To simplify qualification, the IRS provides the safety harbor requirement. To qualify under this rule:

Your rental company must be able to provide 250 hours or more of rental services annually.

You should keep meticulous logs of time spent as well as dates and the type of work you have done.

Records and books are required for every rental activity.

This rule makes it easier for landlords to prove their business activity.



Step 4: Track Rental Services

The IRS defines rental services broadly. The activities that are eligible include:

Tenant communication and screening

The lease is prepared and renewed.

Maintenance and repair schedule

• Bookkeeping, expense and time tracking

Supervising contractors or property managers

If you manage it yourself or delegate the task they count towards the requirement of 250 hours.



Step 5: Group Properties Wisely

If you have multiple rental properties, you can elect to group similar properties together into one business. This simplifies tracking and helps meet the hour threshold much more quickly. The grouping should be consistent every year, so make sure to consult an expert before making any changes.



Step 6: Work With a Tax Advisor

After you've reviewed your activity and documentation, speak with an expert tax advisor to confirm your eligibility. Making sure you have the proper records and documentation will ensure that the deduction is properly applied.



Conclusion

This QBI deduction is one of the most powerful tools for rental property owners--but only if the property is classified as an entity. If you are proactive in managing your rental properties by documenting your services and following the safe harbor guidelines to gain this advantage. By following the right steps, your rental investments will be more lucrative when it comes to tax time.