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

[jbsocal]

Add'l comment: I believe I recall reading that the IRS will allow computing the Qual Bus Income deduction without including loss carry forwards from years prior to 2018. However, the losses are still includable for reducing taxable income. I'm not 100% sure but I think that's what I read. Maybe someone might confirm or correct.

[stong]

Anyone have ideas on what kind of records are needed to prove the 250 hrs?  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-drop/td-reg-107892-18.pdf">https://www.irs.gov/pub/irs-drop/td-reg-10789...> page 17 says: "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 at least 250 hours of services are  performed each taxable year with respect to the enterprise."... "The proposed safe harbor also would require that separate books and records and separate bank accounts be maintained for the rental real estate enterprise."  Then I saw Paragraph "C" at the bottom of page 7 <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-drop/n-19-07.pdf">https://www.irs.gov/pub/irs-drop/n-19-07.pdf</a> : "The taxpayer maintains 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." Seems like more records to maintain for small landlords.

[jbsocal]

It's fortunate that 250 hours are not "required" but is a safe harbor figure because that's a lot of record keeping for a small business owner who rents real estate. The IRS has treated most rental real estate as a business for numerous years so I disagree with their recent tightening in business status. There could be, but I don't recall the IRS disallowing Sec. 162 expenses as not meeting trade or business levels for houses that are actually rented at fair market rates. Expect court cases to follow.

[jbsocal]

I was accurate about loss carryovers.
IRS comments (in part) re.199A Regs:
p40 A. Qualfied Business Income
2. Previously Disallowed Losses
The proposed regulations provide that previously disallowed losses or deductions ("various sections cited") allowed in the taxable year are taken into account for purposes of computing QBI so long as the losses were incurred in a taxable year beginning after January 1, 2018. Because previously disallowed losses incurred for taxable years beginning before January 1, 2018, cannot be taken into account for purposes of computing QBI, several commenters recommended that final regulations provide an ordering rule for the use of such losses.

p41 The Treasury Department and the IRS agree that taxpayers with previously disallowed losses for taxable years beginning both before and after January 1, 2018, require an ordering rule to determine which portion of a previously disallowed loss can be taken into account for purposes of section 199A. Consistent with regulations under former section 199, these regulations provide that any losses disallowed, suspended, or limited under the provisions of sections ("var sections cited"), or any other similar provisions, shall be used, for purposes of section 199A and these regulations, in order from the oldest to the most recent on a FIFO basis.

[giraffes5gb]

Another thing to consider is that you can group the properties together by activity to qualify. However, you cannot group commercial and residential properties into the same activity under the safe harbor. So if you own a commercial building, a residential building, you need 250 hours for each activity. Note the hours requirement is not required under the safe harbor for 2018 so you could apply the safe harbor and have no hourly documentation just for 2018.  Also if you pay a property manager, it is more likely to qualify. But I wonder if property managers will start billing each month with an hours summary, I mean that is literally what is needed. Then the taxpayer just hands over the billing slips to meet the 250 hours to IRS. Not likely that IRS will then go audit the property manager. I look forward to see how this affects the industry.

[jbsocal]

250 hours of activity is NOT REQUIRED for rental property - that's a "safe harbor" election one may chose. I believe 90% of rentals qualify as a trade or business so no such election would be needed for those. I believe a rental with less than 250 hours of activity can easily be considered a trade or business. There are plenty of court cases that support rental real estate being considered a trade or business if the activity is regular, continuous, and with the expectation of profit (that includes the funds received from eventual sale). For purposes of Sec. 199A, any activity performed by any third parties on a rental property are attributable to the owner. Therefore, an owner could have most of the work done by someone else and still be fine. Therefore, I suggest not making the safe-harbor election except in somewhat rare circumstances. If the safe-harbor election is made, a statement signed under penalty of perjury must be attached to the income tax return. I know a CPA who teaches a course on Sec. 199A (20% QBI deduction) and those are his beliefs as well. If in doubt, I suggest contacting an EA (Enrolled Agent) or CPA who is FAMILIAR with the Sec. 199A provisions.

[bhermantin]

specified service trade or business

[Bodie7]

So would a property manager be considered an agent working for you and their time counted toward the 250 hours/year?

[Carl]

Yes it would. To understand the wording, you must have "provided" the service. That doesn't mean that you had to be the one that "performed" the service. Overall, the IRS "clarity" is still vague on this as I see it. Unless you have time sheets or other documentation, I don't see how one could prove the 250 hours one way or the other.

[jbsocal]

Unless your rental activity is very unusual, I suggest NOT electing the Safe Harbor. I believe nearly all rentals qualify as trades or businesses so the Safe Harbor election would not be needed except in very rare circumstances. If you spend anywhere near 250 hours a year, I'd venture to say your rental is a trade or business anyway (assuming you charge fair market rents and your activity is regular and continuous - that could be monthly involvement, not needed every day). Another reason to avoid the 250 hr Safe Harbor is that the election is required to be made under the penalty of perjury and I believe that's another potential headache to avoid.

[Bodie7]

If we do not apply for the QBI this year, can we apply for QBI deduction on next year's return? Or is this a one time declaration?

[TaxGuyBill]

@jbsocal   If you meet the requirements of the Safe Harbor, why on earth would you not claim it?  Meeting the Safe Harbor prevents the IRS from questioning the deduction.  I think you would be crazy to not claim it if you meet the requirements.

[Bodie7]

Still unsure if the requirements for being considered a business are met. Hard to prove if the PM's put in 250 hours. Dont want to raise any red flags as someone else mentioned.

[jbsocal]

If you're not sure the 250 hrs can be proven, I sure wouldn't elect the Safe Harbor by stating under penalty of perjury that the 250 hrs were met. Besides, meeting the 250 hours is NOT a requirement for obtaining the QBI deduction. The Safe Harbor doesn't keep the IRS from questioning the QBI deduction. The IRS can still question the income and deductions all they want. The Safe Harbor merely means the rental real estate enterprise may be treated as a trade or business for purposes of section 199A. Nevertheless, I believe establishing that a rental is a trade or business is not difficult anyway - many court cases show that. If a residential property is rented at a fair market rate, the owner pays the property taxes, property insurance, mortgage if any, & either arranges or does the repairs and maintenance that is probably enough to show that it's a trade or business. And remember that a QBI deduction is not available unless the property produces net income (after all deductions).

[TaxGuyBill]

A Safe Harbor means the IRS can not question that it qualifies as a Trade or Business.

You are signing the tax return under perjury anyways, so signing the Safer Harbor doesn't really change anything in that regards.

There are also court cases that have rules a bit more strictly.  Personally, I think anybody would be foolish if they meet the Safe Harbor and don't use it.  I would rather have the "Trade or Business" affirmed with no-questions-asked rather than arguing with an auditor and going to court.

As a further note, in past years many landlords have NOT been sending out 1099-MISCs for services to non-corporate contractors.  By doing so, they have been implying that the rental is NOT a Trade or Business (because if it was a Trade or Business, 1099-MISCs are required).  If I was an IRS auditor, that circumstance would certainly make me consider denying the QBI because the taxpayer has not been treating it as a Trade or Business.  If the Safe Harbor was there, the auditor could not do that.