We rent out two homes. Would income from these rentals be considered "qualified business income" ?

[jbsocal]

Bodie7 stated, "Hard to prove if the PM's put in 250 hours." If 250 hours can't be proven and even though everything else may be okay, the IRS may pursue the penalty of perjury route. However, I believe that claiming the QBI deduction based on one's belief that an activity is a trade or business doesn't contain the same possible legal ramifications. TaxGuyBill, you stated, "A Safe Harbor means the IRS can not question that it qualifies as a Trade or Business." Technically, that is not true - Read this comments by the IRS: "A rental real estate enterprise that satisfies the proposed safe harbor may be treated as a trade or business solely for purposes of section 199A and such satisfaction does not necessarily determine whether the rental real estate activity is a section 162 trade or business. Likewise, failure to meet the proposed safe harbor would not necessarily preclude rental real estate activities from being a section 162 trade or business." You also mentioned that an auditor may deny the QBI deduction if Forms 1099-Misc aren't filed. That does not follow any US income tax law and auditors can't just do as they wish - laws must be followed. We agree to disagree?

[TaxGuyBill]

I still view it the same way I did before.

As for your last point about the 1099s ...

(a) Claiming QBI without the Safe Harbor means you ARE claiming it is "Trade or Business" (section 162), right?
(b) 1099s are required for a "Trade or Business", right?  So if you are not filing them, you are implying it is NOT a "Trade or Business", right?

So a history of not filing 1099s is a history of claiming it is NOT a Trade or Business.  If you suddenly claim QBI, then the auditor would need to ask "What changed?  Why is this NOW a business when you've been claiming it is NOT a business for years?".  If there wasn't a change in circumstances, the result would likely be either denying QBI or charging large penalties on unfiled 1099s.

[jbsocal]

Not filing a F1099 may merely mean that the requirement to file  was unknown. That doesn't mean non-business status is claimed. If a person has a history of not filing Forms 1099 and claims the Safe Harbor, aren't they indicating the rental is a business, and if so, penalties would still apply for not filing the prior forms. Not claiming the Safe Harbor doesn't mean a payor is exempted from filing past Forms 1099. If a lessor claims the QBI deduction and is also obligated to file Forms 1099, it doesn't matter whether the Safe Harbor is claimed or not, the F1099 are still due. There are plenty of lessors who don't know about the F1099 requirement. In addition, if a lessor claims the Safe Harbor (indicating a trade or business) and when asked about filing past Forms 1099 states it was not required because there was no business those years would run into your same change in circumstances problem. I believe the F1099 issue is irrelevant in claiming the QBI deduction.

[TaxGuyBill]

The very first questions on Schedule E ask if a 1099 is required (and therefore it is in the Instructions for Schedule E), so the lessor has no excuse for not knowing that it is required for a Trade or Business.

[Carl]

Overall, a lot of the tax rules/laws when it comes to rentals are vague. In such situations I always side with how I think the IRS would interpret it. but I do check occasionally on the various tax court websites to see if anyone has yet to challenge any of the vague rules. It may be a few years before we find anything on those sites concerning rentals and the QBI deduction.

[jbsocal]

TaxGuyBill, if you say there's no excuse for not filing a F1099, then why did you make the argument about having a history of not filing the forms creating a problem later if the QBI deduction is claimed? I believe you may have gone into circular reasoning. Some people recommend claiming the Safe Harbor and others do not. I think you need to accept the fact that people have differing opinions. I suggest you do what you feel is correct and let others do the same. Carl is correct.

[TaxGuyBill]

It me it seems clear, but maybe I'm not expressing myself clearly.  I stand by my original thoughts:  (1) It is foolish to not claim the Safe Harbor if you qualify for it and (2) if you have a history of not filing 1099s, it is problematic to suddenly start claiming QBI now (especially without the Safe Harbor).

As you said before, we may need to agree to disagree.

[jbsocal]

One other comment. If a person has a "history" of not filing F1099s, how is the Safe Harbor going to protect them from penalties for not filing F1099? Claiming QBI with or without the Safe Harbor indicates the rental is a trade or business. We've crossed into another issue as I don't recall the original post stating the activity had any Form 1099 requirement.

[TaxGuyBill]

While I don't think it will necessarily protect against it, claiming the Safe Harbor gives a 'maybe' out.  As you pointed out, the Safe Harbor specifically says it is strictly for purposes of QBI, and is not binding for other purposes.

In other words, claiming QBI without the Safe Harbor is stating it *IS* a 162 business, which unarguably requires 1099s.  Claiming QBI with the Safe Harbor is stating it a Trade or Business for QBI purposes, but MIGHT POSSIBLY not be a Trade or Business for other purposes (although I would hesitate to take that stand).

[jbsocal]

Ok, we're close. I agree that claiming the QBI deduction is stating it's a trade or business. The IRS offers trade or business status to an activity with at least 250 hours performed. I believe it would be very difficult for the IRS to overcome a trade or business claim by someone putting in that amount of time without the Safe Harbor but, as you say, it's possible. Good communicating with you.

[jbsocal]

Rents received are considered gross receipts, not income. Rental income is the net amount after rental expenses are deducted. That net may be considered Qualified Business Income. If rental property reports a loss for the year, that property wouldn't qualify for the Qualified Business Income Deduction because that deduction is based on net "income".

[Rick19744]

Some comments on this matter:

• This is not really an area that can be addressed in a forum such as this.  This question is very fact specific and really needs to be handled one on one with a tax professional.
• Having said that, in general, rentals are not a trade or business; defined as a Section 162 trade or business.  Yes, some are able to support that they do qualify as a trade or business, but you can count on this being a red flag with the IRS.  This is a contentious area for the IRS.
• Factors that need to be reviewed are; the type of property (commercial vs residential), the number of properties rented, the day-to-day involvement of the owner, the type of rental (net lease, traditional lease, short-term, long-term) and other factors.
• The proposed regulations do not provide much additional support, however, they are clear that in one special case situation direct real estate investment automatically counts as a trade or business. This occurs when someone rents property to another trade or business they own at least 50 percent of that "other trade or business".  For example; let's say you own a building and you rent this building to a corporation or partnership. If you own at least 50% that entity and it operates a trade or business, your rental property will be considered  a trade or business and qualify for the QBID.
• Adding to the lack of additional support (new support) the House Bill was not adopted by the Conference Agreement.  Neither the Conference Agreement or the Senate Amendment of the Committee Reports discuss the meaning of a "trade or business".  Essentially we are just left with "old" prior law (which is not much) and case law.
• Edited 1/19/2019.  See Notice 2019-07 for guidance on this issue.

[Carl]

I am fairly confident in stating that I will most likely not qualify for the QBID. Rental income is not my primary source of income, and while my wife works a W-2 job I am self-employed. That's where a majority of our spendable and taxable income comes from. So I just don't see how my three rentals would qualify as a trade or business.
On the other side of that coin, my sister owns 7 rentals and is also a licensed real estate agent. Even though she reports her rentals on SCH E separate from the RE agent income, her rentals may very well qualify as a trade or business, or at least as "a part of" her trade or business. But I really can't say for sure at this point. Mainly because she hasn't asked yet. 🙂

[jbsocal]

Rentals don't have to represent your primary source of income to be considered a trade or business. They merely have to be engaged in for profit and any net profit may qualify for the Qualified Business Income Deduction based on other circumstances.

[paulmrogers]

What jbsocal said is just how I read the TurboTax guideline.  But I remain concerned about this, having never seen it as an option in previous years.