Am I Eligible For The Qualified Business Income (QBI) Deduction For Rental Property Income?

[loriprl64]

I know that my rental property income is not qualified for the Safe Harbor credit, but is it for the QBI credit? The property is in California and I live in 1 of the 4 units on the property. I must have a Business License for this property. I am only completing the Schedule E, but not a Schedule C. The rental property income is not passive, as I do (or participate in) all the business work, like the bookkeeping, maintenance, and make all the business decisions. Since I have the license and am active in running the property, does this prove my rental property is a "Trade Or Business", so that I can take the QBI credit?

[AmyC]

The question is the amount of time spent on the activity. A passive activity like collecting rent doesn't take much time. If you spend over 250 hours a year dealing with the rentals, you meet safe harbor and qualify. You said you don't meet the safe harbor requirements, so you do not qualify.

Reference: Qualified Business Income Deduction

[loriprl64]

Hi AmyC,

Regarding Safe Habor, I don't think I qualify for it, because I live in 1 of the 4 units. One of the conditions according to TurboTax said to qualify under safe harbor "Didn't use it as your residence." So I would need to prove the property is a business. It's confusing to me.

[ThomasM125]

It would be a judgement call. The more time you devote to the maintenance of the rental business the more likely it would qualify for QBI treatment. When you say you have four units, if they are separate, with their own bathroom, kitchen and sleeping area, then you wouldn't be considered to be using the rentals as your residence. That would only apply if you were renting several rooms in the same house. 

[loriprl64]

There are 2 structures on the property, a house in the front, and a building that has 3 separated units in it.  When we bought it, all 4 homes were rented. We have always lived in the front house and only rent the 3 units in the back. However, we only receive 1 property tax bill for the entire property. The tax preparer we had didn't put us down as living in a rental and only put a percentage of expenses that were not separated on the Schedule E, but never gave us the QBI deduction.  This is why I am confused. 

[ThomasM125 · Accepted solution]

You aren't living in the rentals since they are separate units. A situation where you would not qualify for QBI treatment would be where you had a property manager take care of everything or you had a lease that required the tenants to do their own repairs, mow their own grass, things like that. In that case you would just be a passive investor. The more active you are in the rental the more likely it will qualify for QBI treatment.

[loriprl64]

Thanks so much for the explanation! Since I do all the business work, and I don't live in a rental unit, would I fall under the safe harbor then? 

[AmyC]

You clearly keep records for your taxes. Do you keep records of the hours you spend and do you spend at least 250 hours on the rentals? If yes, then you qualify for QBI. These are well laid out in Can I get the QBI deduction on rental income?

Generally, this means each rental real estate enterprise (a rental property or group of similar rental properties, including K-1 rental income) must satisfy these three requirements:

1. Each enterprise maintains its own books and records to track income and expenses.
2. An enterprise that has existed less than four years performs at least 250 hours of rental services per year. For an enterprise in existence for four years or more, this test needs to be met for any three of the five consecutive taxable years ending with the taxable year.
3. (Starting with tax year 2019) Contemporaneous records of services performed are kept which includes who performed the service, description of service, the date of the service, and how long it took (who, what, when, and how long).