Rental Property and QBI: How to Know if Your Income Qualifies for the Deduction
Rental Property and QBI: How to Know if Your Income Qualifies for the Deduction
Blog Article
If you are a property owner who owns a rental an of your most important tax questions to answer qualified business income deduction rental property. If it is then you may qualify for a significant tax deduction, which can increase your profit. However, qualifying isn't automatic--it is contingent upon meeting specific IRS guidelines.
Let's take a look at what IRS looks for when determining whether rental activity is a business for the purposes of QBI.
Understanding QBI in a Rental Context
Qualified Business Income is the net income earned from an enterprise or trade that is operated through a pass-through company. Although rental properties are traditionally classified as passive income however, the IRS permits certain rental activity to qualify when they meet the requirements of a business or trade.
The IRS Business Test: Are You Operating Like a Business?
To qualify to claim the QBI deduction the rental activity must be carried out with consistency regularity, consistency, and a profit purpose. The IRS takes into consideration a number of factors in determining whether your rental qualifies as a business
Active Management
You'll need to be involved in managing the property, taking decisions on repairs, tenant interactions along with lease enforcement.
Recordkeeping
The keeping of financial and bookkeeping records as well as tracking expenses and controlling income is a serious business activity.
Operational Structure
The presence of systems for business including regular maintenance programs, tenants onboarding and the use of service suppliers, supports business classification.
Use of the Safe Harbor Rule
The IRS has created a safe harbor rule to make the qualification clearer. If your rental enterprise:
Maintains separate records and books as well as
Completes at least 250 hours of rental service per year, and
Keeps a log of times, dates and activities,
...then it is generally considered an enterprise in the eyes of QBI reasons.
This safeguard applies to each enterprise separately or in a group if similar properties are grouped together.
What Activities Count as Rental Services?
The rental services covered by the Safe Harbor rule include:
Advertising and tenant screening
Renewal and lease negotiation
Repairs and maintenance to the property
Bookkeeping and rent collection
Coordination with Service professionals
Even if you employ others to assist, the hours count nonetheless. Just be sure that the services are related to the rental activity.
Common Situations That Qualify
Owning multiple properties and managing them effectively
Short-term rental with regular tenant turnover
Long-term rentals with regular improvements and involvement from management
Conclusion
If the rental income you earn is eligible for the QBI deduction depends on how you manage your business. If you are aware of IRS guidelines, and particularly the safe harbor rule, you can set your rental business in a way that it meets the threshold for business. If done properly, this can lead to significant tax savings every year.