It could be. But it is not common for someone who owns 3 or less rentals to actually qualify for the QBI on that income. The biggest hurdle is passing the "hours of service" test. I myself own three rentals and don't come anywhere close to passing this test.
Hours-of-Service Tests
For a rental real estate enterprise that's been in existence for fewer than four years, at least 250 hours of rental services must be performed each year for income from the enterprise to count as QBI.
For a rental real estate enterprise that's been in existence for at least four years, at least 250 hours of rental services must be performed during each of any of three of the five consecutive tax years that end with the current tax year.
For purposes of passing the hours-of-service tests, rental services include:
- Advertising to rent or lease real estate,
- Negotiating and executing leases,
- Verifying information contained in prospective tenant applications,
- Collecting rents,
- Performing daily operation, maintenance and repair of property,
- Managing property,
- Purchasing materials, and
- Supervising employees and independent contractors.
Rental services can be performed by owners (including owners of an RPE), employees, agents, and independent contractors.
Important: Rental services do not include financial or investment management activities. Examples of non-qualifying activities include:
- Arranging financing,
- Acquiring property,
- Studying and reviewing financial statements or reports of operations,
- Planning, managing or constructing long-term capital improvements, and
- Traveling to and from properties.
Record Keeping Requirements
To prove that the hours-of-service test was passed, taxpayers must maintain contemporaneous records including time reports, logs or similar documents to establish:
- Hours for all services performed,
- Descriptions of all services performed,
- Dates on which the services were performed, and
- Who performed the services.
If services are performed by employees or independent contractors, you can provide:
- A description of the services performed by each employee or independent contractor,
- The amount of time the employee or independent contractor generally spends performing such services, and
- Time, wage or payment records for the employee or independent contractor.
Such records must be supplied to the IRS upon request.
Important: The contemporaneous record keeping requirements for the hours-of-service tests do not apply to tax years beginning before January 1, 2020. So, calendar-year 2018 and 2019 federal income tax returns aren't affected. However, in the event of an audit, taxpayers bear the burden of proving that they're entitled to any claimed deductions. So you still need to maintain records.
Tax Return Statement Requirement
The individual, estate, trust or RPE that owns a rental real estate enterprise must attach a statement to a timely filed original federal income tax return (or an amended return for the 2018 tax year) for each tax year in which the taxpayer relies on the safe harbor. The statement must include the following information:
- A description, including the address and rental category, of all rental real estate properties that are included in each rental real estate enterprise,
- A description, including the address and rental category, of rental real estate properties acquired and disposed of during the tax year, and
- A representation that the requirements of Revenue Procedure 2019-38 have been satisfied.
An individual, estate, trust or RPE that owns more than one rental real estate enterprise can submit a single statement. But the statement must list the required information separately for each rental real estate enterprise.
Ineligible Property
