Why when I choose rental qualified as trade or business I end up see higher tax due?

[tianwaifeixian]

My husband is a real estate agent and we have rental properties that he manages. I thought rental qualifies as a trade or a business should lower the tax due. But when I click "yes" to that question, my tax due actually is higher than if I choose "No" to that question. Anyone knows why?

[LeonardS]

The reason may be due to claiming you are a real estate professional, rental real estate is not considered a passive activity for you. Therefore, the passive income deduction rules don't apply to you at all and this could be a reason why your tax liability goes up when you claim to be a professional real estate person.  

[tianwaifeixian]

Thank you! If that is the case, what is the benefit of claiming the rental as qualified as trade or business? Do I have a choice to say NO on this question to get lower tax due? 

[MinhT1]

Whether you qualify as a real estate professional will determine whether your rental income is passive or not. This will depend whether you pass the tests. You must not answer the question just in order to lower your taxes.

You are a real estate professional if all of the following are true:

 - You materially participated in a real property trade or business.

 - More than half of your time is involved in real estate activities during the year.

 - You materially participated for more than 750 hours in this business.

 - You materially participated in each rental real estate activity.

In Turbotax, you need to check both boxes saying that you spend more than 750 hours a year actively involved in real estate and that you spent more than 50% of your work-related time involved in real estate

[AmeliesUncle]

I agree, in most cases that doesn't make sense.

You are entering them in the rental section of TurboTax, right?  Don't enter them in the 'business' section of TurboTax.

[tianwaifeixian]

Do I have that choice? I only see rental in the business section. Where else can I enter the rental info? I am using the business version

[tianwaifeixian]

Thank you! Just curious, if that is the case, why turbo tax still ask me whether rental qualifies as a trade or business question after I have already checked that I am a professional? Should it be automatically treated as Yes?

[AmeliesUncle]

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@tianwaifeixian wrote:

Thank you! Just curious, if that is the case, why turbo tax still ask me whether rental qualifies as a trade or business question after I have already checked that I am a professional? Should it be automatically treated as Yes?

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I suspect that question is for determining if you qualify for the "Qualified Business Income" (QBI) deduction.  It is a separate tax provision, so the program doesn't automatically link the Real Estate Professional with that (and the rental can still be a Trade or Business even if a person is not a Real Estate Professional).

However, I can't think of why saying "yes" to QBI would INCREASE your tax.  It should either lower it or keep it the same.

[tianwaifeixian]

Thank you! That's why I am confused. At least it should not increase the due, right?

[AmeliesUncle]

Personally, I would print out the entire tax return when saying "yes" to that question then print it out again when saying "no" to that question".  Then go through the tax return to see EXACTLY what is changing.