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

[paulmrogers]

We rent two homes.  Our purpose is profit.  Is the rent considered a "qualified business income", for purposes of receiving the tax deduction?

[Carl]

You'll report it on SCH E as I'm sure you always have, and yes, it will get the 20% QBI deduction if you qualify. I don't know that many rental property owners that will qualify myself. But that's not to say you won't. I'm also not *quite* up to snuff yet on that QBI deduction with my three rentals. Since one of my rentals was paid off a few years back, I'm only been showing an actual profit on my SCH E for about 3 years now. But I don't think it will be enough to qualify me for the 20% QBID.

[paulmrogers]

I thank you for taking the time to respond.  Sounds like it remains confusing.  I have never seen this addressed in past returns, so I remain reluctant to declare for the QBI.  Again, my thanks for your thoughts.

[Carl]

One issue I see with rental property owners such as you and I, is that its not common for us to show an actual taxable profit on rental income. Especially if the property has a mortgage on it. It's more common to show ever increases losses that carry forward each year, due to mortgage interest and the depreciation we're required by law to take.

[jbsocal]

The QBID is a new deduction (new law starting 1-1-2018) so it would not have been shown on your prior income tax returns. The QBI deduction is computed on the net income a business (including rentals) produces so it is after all rental deductions such as mortgage interest, property tax, repairs, depreciation, etc. If the rental properties reported on your Schedule E report a profit, then you will likely qualify for the QBID if your taxable income is less than $315,000. If taxable income is greater than $315,000, the deduction may be reduced. The computation is a bit complicated.

[paulmrogers]

Having been offered several insights, as from jbsocal, I  am gaining enough confidence to believe, in my situation, net rental income will qualify for QBID.  Thank you

[Carl]

Basically, to have QBI you must have a taxable profit. It is not common for rental property to show a profit on paper at tax time, because for most just the mortgage interest and depreciation alone are enough to cancel out any taxable profit. It just depends on the rent you charge and the cost basis being depreciated.

[paulmrogers]

Yes, I am convinced Carl is correct.  I have owned these properties long enough to begin to show a profit after all deductions for expenses have been accounted.  Thank you.

[Carl]

That's my situation too. Of my three rentals, one of them was paid off a few years back. After the payoff it took a few years to "use up" my accumulated losses, and now a show a taxable profit. It's not much yet. But still......It will be a learning experience for me to see if I actually get any relief from the QBI.

[TaxGuyBill]

The IRS *JUST* released a "Safe Harbor" about this about an hour ago.  In a nutshell, the Safe Harbor says if you spend 250 hours a year, it qualifies as a Business.
<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>

While spending less than 250 hours a year does not necessarily mean it is NOT a business, that DOES make it MUCH more questionable, and I would not recommend doing that.

[Rick19744]

This is actually commendable that:
1) There is some form of guidance related to this issue
2) That the guidance has been issued "quickly" (relative term given it is Treasury and IRS we are dealing with)
3) The hours threshold is below the general 500 hour rule for material participation

The key is, though, rental property owners need to make sure they have the records up front, but I guess the statement that must be attached to the return under penalties of perjury SHOULD force this record keeping.

Other than that, this is taxpayer favorable.

[jbsocal]

Less than 250 hours may qualify. Per IRS 1-18-19: 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. 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. (My comment: Less than 250 hours may qualify provided activities are sufficient and meet the Code Section 162 standard, which essentially is: There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. In general, a trade or business is an activity engaged in for profit. I believe most people with rental real estate will take the deduction if the property is rented and not held merely for investment/appreciation.)

[jbsocal]

Carl mentioned having a rental profit for about the past 3 years.
The IRS presumes that an activity is engaged in for profit if it had profit in 3 of the last 5 years. Engaged in for profit generally is a major attribute in determining trade or business status. The QBI deduction applies to a trade or business.

[Carl]

Yes, After I paid off one of my three rentals a few years back, it took a few years after to "eat up" all my carry forward losses. It was either 2016 or 2017 was the first year I actually showed a taxable profit on the rental income.

[jbsocal]

Carl, I noticed that in your question you said you rent "two" houses and you also commented later that you paid off one of your "three" rentals. Regardless, based on what you've stated, I believe you will likely qualify for the QBI deduction if you have been renting at fair rental rates for years (i.e. not highly discounted to related parties -- some discount would be fine if you expect them to take better care of the place.) Sounds like you'll have 3 years of profit out of 5 by either 2018 or 2019 anyway. With positive cash flows, it appears you've planned well for retirement.