199A QBI deduction for rental properties

[manbeing]

I have four rental properties. I record expense, income and depreciation, etc. for each of them in TurboTax. (I don't think TT allows a way to record them as a whole).

Now can I treat those 4 properties as a single enterprise and apply QBID to it and thus 250 service hours will be required to a single enterprise rather than 250 hrs for each of them?

Thanks.

[DanielV01 · Accepted solution]

Chances are they qualify for Section 199A.  Although the IRS provided "safe harbor" rules regarding rental income, the real standard is whether the activity rises to the level of Section 162 as a business activity.  Court precedent has established that a single rental (let alone 4 separate rentals) rises to the level of a business activity if there is a "for-profit" motive, even when there is a loss on the endeavor.  The simplest question that can be asked is:  Were you renting at fair rental value for your area?  If you were, your activity essentially qualifies for the deduction.

How much deduction you will qualify for will depend on a lot of other factors.  For more information on this topic, please see the following FAQ:  https://ttlc.intuit.com/replies/7122193

[manbeing]

@DanielV01Thanks for replying my question last  year.

I am still using TurboTax this year. I am under impression that TurboTax doesn't attempt to apply Safe Harbor to rental property income as it doesn't alert or ask customers to keep the record of minimal 250 hours for rental property service. Instead, it just simply says that "if rental or royalty activity is based in the U.S. and carried on with regularity, continuity and a profit motive, then income from this activity is considered QBI", after I checked the option that "Yes, this income is QBI", TurboxTax applied 20% deduction on my rental income.

Does that mean TurboTax is using Section 162 to treat rental real estate as a trade or business for purposes of determining the QBI deduction?

IRS defines three tests for rental real estate.

Q48. When is rental real estate treated as a trade or business for purposes of determining the QBI deduction?

A48. Rental real estate is treated as a trade or business for purposes of the QBI deduction under section 199A if it meets any of the following three tests:

1. The rental real estate rises to the level of a section 162 trade or business.
2. The rental real estate is a rental real estate enterprise meeting the requirements of the safe harbor provided in Revenue Procedure 2019-38. See Q49.
3. The rental or licensing of property is to a commonly controlled trade or business operated by an individual or a passthrough entity as described in Treas. Reg. § 1.199A-1(b)(14). This is often referred to as a self-rental.

[manbeing]

Q48. When is rental real estate treated as a trade or business for purposes of determining the QBI deduction?

A48. Rental real estate is treated as a trade or business for purposes of the QBI deduction under section 199A if it meets any of the following three tests:

1. The rental real estate rises to the level of a section 162 trade or business.
2. The rental real estate is a rental real estate enterprise meeting the requirements of the safe harbor provided in Revenue Procedure 2019-38. See Q49.
3. The rental or licensing of property is to a commonly controlled trade or business operated by an individual or a passthrough entity as described in Treas. Reg. § 1.199A-1(b)(14). This is often referred to as a self-rental.

[DaveF1006]

To help clarify how rental real estate qualifies for a QBI deduction, please review this link from the Journal of Accountancy, which is a trusted source for tax-related questions. It does an excellent job explaining QBI and the Safe Harbor Provision.

In answer to your question, Turbo Tax does use Section 162 to treat rental real estate as a trade or business for purposes of determining the QBI deduction.  Please review this link to verify this fact.

Edited 02/02/2020 9:10 PM

[manbeing]

@DaveF1006I read through two links you enclosed. Although the second link is dedicated to Section 162, most of contents from link is related to 1099A Safe Harbor, which doesn't answer my question.

I have a few of rental properties but I didn't perform the enough 250 hours rental service activities in 2019. Obviously, Safe Harbor cannot be applied , so I just wanted to know if Section 160 can still be applied to treat my rental properties as a trade or business thus I am able to be qualified for 20% QBI deduction, and I do want confirm that TurboTax actually does apply Section 160 to rental properties as it doesn't ask me about the 250 hours on screen or in the instruction.

[ColeenD3]

Section 162

Trade or business. Section 199A(d) defines a qualified trade or business as any trade or business other than a specified service trade or business (SSTB) or a trade or business of performing services as an employee. Section 1.199A-1(b)(14) defines trade or business for purposes of section 199A as a trade or business under section 162 other than the trade or business of performing services as an employee.

In addition, § 1.199A-1(b)(14) provides that rental or licensing of tangible or intangible property (rental activity) that does not rise to the level of a section 162 trade or business is nevertheless treated as a trade or business for purposes of section 199A, if the property is rented or licensed to a trade or business conducted by the individual or a relevant passthrough entity (RPE) which is commonly controlled under § 1.199A-4. Sections 1.199A-5(b) and 1.199A-5(d) define an SSTB and the trade or business of performing services as an employee, respectively.