Qualified Business Income Deduction for Rental Income

[rand90210]

 I am retired with 1 rental home which I 100% manage.  Last year I had my taxes done by a CPA and noticed there is a Qualified Business Income Deduction on form 8995 and my 1040.  

My understanding is there are two guidelines on doing a Qualified Business Income Deduction for rentals and one should be selected.

1)   I declare Rental activity is a trade or business under the safe harbor rules for qualified business income. 

2)  I declare the rental qualifies for the Qualified Business Income Deduction without the safe harbor election.  

From my last year tax forms how can I tell which option my CPA made in order to take the Qualified Business Income Deduction?

[PatriciaV]

If you claimed the Safe Harbor Election for QBI last year, there should be an election statement in your tax forms that mentions Revenue Procedure 2019-38.

The QBI safe harbor is a way to prove to the IRS that your rental property is not an investment but a business, the income from which becomes QBI (qualified business income). That is if you meet the conditions of the safe harbor.

If you meet the conditions, the IRS has confidence that your rental is a business. This is because the conditions for the safe harbor more clearly define your rental as a business. If you meet the conditions, you lower your audit risk. That's the safe part of the safe harbor.

To take the QBI safe harbor, you must have:

For a single property

  1. Performed rental services for at least 250 hours (you or someone you hired)

  2. Kept separate books and records showing income and expenses

  3. Didn't use it as your residence

  4. Didn't lease the property under a triple net lease

  5. Didn't rent the property to a commonly controlled business

You can also qualify for QBI with other criteria without taking the safe harbor. In fact, if you select No on the Safe Harbor Election screen, we'll ask if you'd like to qualify as a business next. That qualification is easier to get but more open to audits by the IRS; you lose the safe part of the safe harbor.

[rand90210]

Thank you for the reply.  That makes a lot of sense.  I checked my 2022 tax forms and there is no safe harbor statement so my CPA last year must be going with the option "qualify without safe harbor".

Under this scenario, what type of conditions would a rental property need to meet to feel comfortable taking the QBI without safe harbor?

[MonikaK1]

What if you own a rental but don’t qualify as a real estate professional and you don't claim the safe harbor election? Turns out you can qualify for the QBI deduction, as long as your rental activities constitute a trade or business under IRC § 162.

A qualified trade or business is any section 162 trade or business, with three exceptions:

1. A trade or business conducted by a C corporation.
    
2. The trade or business of performing services as an employee.
    
3. For taxpayers with taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs). An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The principal asset of a trade or business is the reputation or skill of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual's image, likeness, voice, or other symbols associated with the individual's identity, or appearances at events or on radio, television, or other media formats.

The SSTB exception does not apply for taxpayers with taxable income at or below the threshold amount ( taxable income more than $232,100, $464,200 if married filing jointly), and is phased in for taxpayers with taxable income within the phase-in range. For taxpayers with taxable income above the phase-in range, no deduction is permitted with respect to any SSTB.

Even if you didn't claim the safe harbor election, following the practices associated with the election may enhance the likelihood that your rental activity could be held to be a trade or business in the event of an audit.

[AmeliesUncle]

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@rand90210 wrote:

Under this scenario, what type of conditions would a rental property need to meet to feel comfortable taking the QBI without safe harbor?

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In my opinion, there is no "comfortable" point unless the circumstances EXCEED the Safe Harbor limits.

I think MOST tax professionals lean towards it qualifying without the Safe Harbor.  Personally, I don't.  If the IRS Safe Harbor requires 250 hours (and other things) to be "safe" that means less than 250 hours is potentially 'un-safe'.

Don't misunderstand me; you certainly CAN qualify for QBI when it is under 250 hours.  But in my opinion, the farther you are away from 250 hours, the less 'safe' it becomes.