Need clarifications: Section 162 for rental properties to get QBI deduction

[AmeliesUncle]

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@Anonymous_ wrote:

Nevertheless, I still question the inability to meet the safe harbor minimum based upon the facts stated in the posts. With more than one rental property and handling all of the management functions, tenant services, leases, hiring (and perhaps supervising) contractors, et al., I would think 250/yr would not be a reach.

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It obviously can vary tremendously, but if you have a decent, long-term tenant, here are some random estimates:

1. Open envelope to rent check, make deposit slip, go to bank for deposit.  Maybe an hour a month?  So 12 hours a year?
2. Tenant calls with a problem three times a year.  Hour of your time and 3 hours for a contractor.  So 12 hours per year?
3. Major problem, significant inspection and/or significant maintenance on the home.   MAYBE once a year?  So maybe 4 hours of your time and 20 hours for a contractor?
4. Renew lease.  One hour.

In that grossly simplified example, that is about 50 hours a year.  And I suspect that in many cases, it would be noticeably less than that.  Yes, of course there are definitely circumstances that could be significantly more than that (especially if you are getting new tenants often), but I suspect the 'average' hours per rental is fairly low.  But perhaps I am wrong.

[Anonymous_]

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@AmeliesUncle wrote:

In that grossly simplified example, that is about 50 hours a year.  And I suspect that in many cases, it would be noticeably less than that. 

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As it happens, it appears there are multiple threads on this exact issue. Two of the threads were started by this OP while another was started by someone else, with another username at least (and it remains unanswered).

See QBI Deduction For Rentals (intuit.com)

The above link is to the thread I had stuck in my head and, as you can see, the owner has two rentals and stated, "We manage all aspects of running this activity from selecting tenants, doing repairs, hiring contractors, writing lease documentation, collecting rent, keeping records, etc.", yet maintains they fall short of the 250-hour threshold - that is a lot of activity which seems like it could easily chew up circa 21 hours a month.

[manbeing]

I had 4 rental properties in the past. I managed them myself.  One year, in order to meet the safe harbor criteria, I HONESTLY recorded all the activies I spent on the rental management (including contractors'). The total hours were way below 250 hours, thus I gave up my attempt to use safe harbor since then, and I never claimed QBI deduction on my rental property income including this year ( I know some similar landlords did even they didn't meet safe harbor criteria) as I think it might cause IRS audit because I am a part-time landlord and my rental management activity is considered to be passive, additionally, Section 162 defining a rental business is vaguer.   I just don't know how IRS figured out this 250 hours threshold , at least it never applied to my case.

[Anonymous_]

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@manbeing wrote:

...I just don't know how IRS figured out this 250 hours threshold, at least it never applied to my case.

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I think the yield here is that the failure to meet the safe harbor requirements will result in (if questioned) having to establish regular, continuous, and considerable activity that rises to the level of a trade or business for the purposes of Section 199A. 

Frankly, I have no idea how one would establish "regular, continuous, and considerable activity" based on putting in 50, 100, or even 150 hours a year. I know people who work full-time and still manage to spend 250 hours a year on the golf course.

[manbeing]

Exactly!  250 hours per year, that is 4.8 hours per week.  I really don't think any part-time landlords could spent that much time on the rentals, unless you have an apartment building, but when you have an apartment building at some point, you would probably form a company rather than an individual.

[Anonymous_]

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@manbeing wrote:

Exactly!  250 hours per year, that is 4.8 hours per week.  I really don't think any part-time landlords could spent that much time on the rentals.....

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My wife does spend that much time (actually more than 250/year), but the rental is short-term (minimum one week but with a few renters staying 2 or more weeks).

However, we still do not claim the QBI deduction as my feeling is the risk (of having to produce documentation in an audit) outweighs any tax savings..