Does remodeling my rental property during ( spent more than 250 hours ) count as substantial services for classifying my rental as a business and report on schedule C?

[Anonymous_ · Accepted solution]

No, remodeling does not count with respect to providing substantial services.

See https://www.irs.gov/publications/p527#en_US_2020_publink1000234065

Providing substantial services.

If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc.

[Carl]

It is perfectly possible that you may qualify as a business specifically for the 20% QBI deduction on your rental. But that has nothing to do with it qualifying as a SCH C business. See https://www.irs.gov/newsroom/irs-finalizes-safe-harbor-to-allow-rental-real-estate-to-qualify-as-a-b... for more information.

Substantial services are those which are directly beneficial to the tenant. For example, Cooking and cleaning for the tenant on a regular basis. Daily or weekly laundry service, etc. These costs are generally included in the rent and so stated in the lease agreement. Something like yard service does not count because that would be something you would do weather the property is occupied or not.

A remodel is generally something that betters or improves the property. Typically, those things are capitalized and depreciated over time in the Assets/Depreciation section. Weather it's capitalized or deducted as a rental expense, depends on what you are calling a "remodel".

But as for it being classified as a SCH C business, a remodel or repair does not contribute to that determination.

Also keep in mind that a SCH E business that later qualifies to be classified as a SCH C business creates more paperwork too. For example, SCH E residential rental property is depreciated over 27.5 years, where as SCH C business property is depreciated over 39 years. Therefore, when changing from SCH E to SCH C (or vice-versa) one has to manually figure a new cost basis and manually keep track of prior depreciation taken before the change, so that it can be property accounted for years down the road when the property is sold or otherwise disposed of.

[Anonymous_]

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@Carl wrote:

It is perfectly possible that you may qualify as a business specifically for the 20% QBI deduction on your rental.....

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It is actually highly unlikely as remodeling connotes an improvement and time spent making improvements do not count toward the safe harbor of 250 or more hours of rental services.

See rp-19-38.pdf (irs.gov)

[Carl]

Maybe I should have made it clearer, that remodeling has nothing to do with qualifying for QBI. But one certainly could qualify for QBI outside of that. Its likely possible the OP is confusing things between qualifying as a SCH C business, and qualifying for the QBI deduction. The 250 hours mentioned is one of the requirements to qualify for QBI. Whereas I "think" it's something like 750 hours is but one of the requirements to qualify as a SCH C business.

[Anonymous_]

You are correct; there appears to be some confusion since the 250-hour for the 199A safe harbor was mentioned.

Regardless, there is no 750-hour requirement for the rental property to qualify for Schedule C treatment, which would involve providing "substantial services" or being classified as a real estate dealer.

[9corners]

Hi Carl,
Thanks for yours and tagteam's replies.

I am trying to reconcile your reply about "yard service does not count". 

In the rp-19-38.pdf link, it states "… (v) daily operation, maintenance, and repair of the property,...", which would seem to mean yard service is counted.  (My rental value would be reduced if a yard is not properly maintained.)
So does the IRS prohibit the inclusion of yard service in some other statement?

[Anonymous_]

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@9corners wrote:

I am trying to reconcile your reply about "yard service does not count". 

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Yes, yard services would count, hence the "maintenance and repair" language in the Rev. Proc.

[Carl]

Yard service does not count for services directly beneficial to the tenant, as maintaining the yard is something that is done weather you have an occupant renting the property, or not.

I've seen situations where yard service may be included in the rent, and that's fine. But that service alone doesn't qualify the rental as a SCH C type of business.

[Anonymous_]

While yard services, as the term commonly connotes, does not qualify the rental for Schedule C treatment, it could certainly count towards the 250-hour safe harbor for the purposes of Section 199A.