Business & farm

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.