Being a landlord who owns rental property does in fact, mean you are "in business" for yourself. But not in the traditional way you might think or expect.
Normally, someone who is self-employed goes out and actually has to "do something" on a recurring basis to "earn" the business income. This type of business owned by only one person and not incorporated, reports it's business income and expenses on SCH C as a physical part of the owner's personal 1040 tax return. The IRS considers such a business to be a disregarded entity. Since the income is "earned" the owner of the business pays regular taxes on the profit, in addition to the "employer side" of social security and Medicare. It's an additional 15.3% on top of the "normal" taxes paid on the profits of the business. This is referred to as the Self-Employment tax.
Rental income is different. Rental income is passive income. You don't actually "do" anything on a recurring basis to earn it. All you do is "sit there" and collect the rent every month. Therefore rental expenses are also considered passive expenses. This is why rental property income/expenses are reported on SCH E and not SCH C.
Because the income is passive (meaning that it's unearned income since you don't "do" anything on a recurring basis to actually "earn" it) that income is not subject to the additional 15.3% self-employment. Also, unlike earned income, rental income does not count when determining the maximum amount that can be contributed to a tax deferred retirement account (such as a traditional or ROTH IRA) either. Additionally, that passive rental income does not get included when it's time to determine your social security payments when you reach retirement age.
can therefore utilize the Section 179
Residential rental property does not qualify for the SCH179 deduction. Period. End of Story. But many things do qualify for the special depreciation allowance.
and/or TCJA “pass through” depreciation calculations.
It is "RARE" for a rental property owner to actually qualify for the QBI deduction. The biggest hurdle is meeting that 250 hours per year requirement of being "actively involved" in the rental property you own. I myself own three rental properties and can't come anywhere close to meeting that requirement. In fact, I had a rental go empty in 2019 and spent a week (40 hours) turning it around to prepare for the next renter. Even so, I still can't exceed 100 hours for the entire 2019 tax year with all three rentals combined.
So if you have only one rental property and plan to claim the income qualifies for QBI, I can't say one way or the other your chances of being audited on that claim. But it's up to you if you want to risk it. I most certainly would not.
Specifically, to qualify for the 20% QBI deduction on rental real estate, the taxpayer’s real estate must be directly owned by an individual or eligible pass-through entity (or through a disregarded entity), and their must also be at least 250 hours of total documented “rental services” activity performed in order to qualify.
See IRS Notice 2019-07 at https://www.irs.gov/pub/irs-drop/n-19-07.pdf
As a first time landlord, the below information will provide you the clarity you need for entering your rental property in the TurboTax program for your first time. Perfection on your tax return in that first year is not an option. It's a must. Even the tiniest of mistakes will grow exponentially over time. Then when you catch your error years down the road, the cost of fixing it will be expensive. I guarantee it.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
