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QBI deduction on rental income if spending less than 250 hours providing service?

I own a rental home but am unsure if I actually spend 250 hours a year providing rental services. Can I get the QBI deduction on rental income? I am very unclear about what are the specifics and I want to be certain before I opt for the deduction.

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9 Replies

QBI deduction on rental income if spending less than 250 hours providing service?

Can I get the QBI deduction on rental income?

Qualified business income, or QBI, is the net income generated by any qualified trade or business under Internal Revenue Code (IRC) § 162.

 

Rental properties are typically treated as passive activities, which are excluded from the definition of a qualified trade or business. However, rentals that qualify as trades or businesses under IRC § 162 are not considered passive, and that means their income can qualify for the QBI deduction.

 

To provide preliminary guidance to this popular question, the IRS recently released Notice 2019-07, the key points of which we've summarized below. We expect that IRS guidance will continue to evolve around this topic, and will provide updates when that occurs. Bookmark this page and check back often!

Exclusions

Income from these types of rentals is specifically excluded for the purposes of the QBI deduction:

  • Passive rental activities that are not considered a trade or business
    • For example, a single-family dwelling rented out for a year or more in which there is little or no interaction between the landlord and the tenants other than periodically collecting rent and the occasional repair
  • Property used as a residence by the taxpayer for any part of the year under IRC § 280A
    • This includes vacation homes, cabins, seasonal or "snowbird" residences, etc.
  • Triple-Net (NNN) leases, where the tenant or lessee pays real estate taxes, insurance, and maintenance in addition to rent and utilities
  • Rentals located outside the United States
  • Land rentals

If your rental or rental activities fall into any of the above categories, you can't take the QBI deduction on the income.

Real Estate Professionals

If you’re a real estate professional for tax purposes (that is, over 50% of the personal services you performed in business during the tax year were in a real estate business you materially participated in for more than 750 hours that same year) then your rental income qualifies for the QBI deduction, provided all the other conditions are met.

Everybody Else

What if you own a rental – or three – but don’t qualify as a real estate professional? Turns out you can qualify for the QBI deduction, as long as your rental activities constitute a trade or business.

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 requirements:

  1. Each enterprise has its own books and records to track income and expenses;
  2. At least 250 hours of rental services are performed per year per enterprise; and
  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).

Rental services can be performed by the owners or by their employees, independent contractors, or agents and would include things like:

  • General operation, maintenance, and repair of the property
  • Purchasing materials
  • Property management activities
  • Supervising employees and contractors
  • Advertising the property for rent
  • Tenant selection and background checks
  • Negotiating and executing leases
  • Collecting and depositing rent

Activities excluded from the definition of rental services include:

  • Time spent traveling to and from the property
  • Reviewing financial statements or operational reports
  • Financial or investment management (for example, financing)
  • Procuring or acquiring property to rent
  • Planning, managing, or constructing long-term capital improvements

Please note that if a rental fails to satisfy these requirements, the enterprise could still be treated as a qualified trade or business for the purposes of the QBI deduction, provided it meets the definition of a trade or business under IRC § 162.

Related Information:

QBI deduction on rental income if spending less than 250 hours providing service?

How is it physically possible for provide AT LEAST 250 hours or rental service PER ENTERPRISE? So if someone has 4 rental properties? Besides how does one keep track of and prove the hours? This requirement is ambiguous.

QBI deduction on rental income if spending less than 250 hours providing service?


@pearl12970 wrote:

Besides how does one keep track of and prove the hours? This requirement is ambiguous.


You need to maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services.

 

See https://www.irs.gov/pub/irs-drop/n-19-07.pdf

Carl
Level 15

QBI deduction on rental income if spending less than 250 hours providing service?

I myself own three rental properties. But even so, rental income doesn't even come close to providing more than half my income and even if it did, there's no way on this green earth that I can convince anyone that I spend more than 250 hours a year directly involved in the rental property - even if I combine all three. That would require an average of 4 hours and 50 minutes a week.

So the reality is, a vast majority of us rental property owner's just flat out will not qualify for the QBI. If I were to claim it, then I would fully expect to be called on it by the IRS (i.e.; audited) 24-36 months down the road after claiming it. Therefore I'm not even going to consider trying to claim QBI on my rentals. For me it would be the equivalent of hanging a sign out that reads, "HEY! IRS! AUDIT ME NOW! I WANT TO PAY LOTS OF FINES, PENALTIES, BACK TAXES AND INTEREST! PLEASE! HURRY! QUICK! FAST!"

QBI deduction on rental income if spending less than 250 hours providing service?

Carl,

You are right. It's literally an invitation for IRS:)

QBI deduction on rental income if spending less than 250 hours providing service?

Confusing QBI screen.png

QBI deduction on rental income if spending less than 250 hours providing service?

It seems that the TT screen says the rental properties carrying on with regularity, continuity and a profit motive  qualify for QBI.  I guess many rental properties would qualify.

Anonymous
Not applicable

QBI deduction on rental income if spending less than 250 hours providing service?

Under the proposed safe harbor, a rental real estate enterprise may be treated
as a trade or business for purposes of section 199A if at least 250 hours of services are
performed each taxable year with respect to the enterprise. This includes services
performed by owners, employees, and independent contractors and time spent on
maintenance, repairs, collection of rent, payment of expenses, provision of services to
tenants, and efforts to rent the property. Hours spent by any person with respect to the
owner’s capacity as an investor, such as arranging financing, procuring property,
reviewing financial statements or reports on operations, planning, managing, or
constructing long-term capital improvements, and traveling to and from the real estate
are not considered to be hours of service with respect to the enterprise. The safe harbor also requires that separate books and records and separate bank accounts be maintained for the rental real estate enterprise

 

here's a link to the IRS final regulations 

https://www.irs.gov/pub/irs-drop/rp-19-38.pdf

the IRS further adds

If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the section 199A deduction. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations.

 

 

note that the 250 hours doesn't have to be all yours. see bold text. 

I've seen many partnerships say their rental income qualifies for 199A.  the partner is a passive investor who performs no services with regard to the real estate.

QBI deduction on rental income if spending less than 250 hours providing service?

Thanks.

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