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manbeing
Level 3

Tax experts: Please help me with the QBI deduction for rental proprites

Suppose I have three rental properties.

The first two properties generated positive gains in 2020 and the 3rd one had the loss.

Can I put the first two profitable rental properties in one entity/enterprise and apply QBI deduction (199A) on it, and leave 3rd property alone (no QBI deduction)? or I have to put all of  three rental properties in one entity no matter whether each of them is profitable or loss?

 

Thanks.

1 Best answer

Accepted Solutions
DianeW777
Expert Alumni

Tax experts: Please help me with the QBI deduction for rental proprites

It depends.  If you believe one of the rental properties is somehow different and doesn't rise to the level of a trade or business as defined next, then you can make a decision to exclude one property. However, if you are making the decision to increase your qualified business income deduction (QBID) without foundation, then you should include all or none.  See the information in the Revenue Procedure next.

 

Rental real estate does not always rise to the level necessary for the qualified business income deduction (QBID).  The second notice, produced by the IRS, defines more clearly about the safe harbor on page 5 of Revenue Procedure 2019-38 and helps you to understand the required record keeping to qualify for QBID.

  1. Select to Edit or Review beside each rental property > Scroll to LESS COMMON SITUATIONS > Select QBI
  2. You see the aggregation screen if you indicated that your taxable income might exceed certain levels. Otherwise, the "aggregation" screen does not appear. (It's not necessary to aggregate)
  3. If you do not select either safe harbor methods the next screen will ask you if this is qualified business income. If you select 'Yes' then TurboTax will do the calculations. 
    • Be sure to select and read the link "More Info about what's considered a qualified business" before you answer.
  4. See the images below.

View solution in original post

7 Replies
npierson7
Level 1

Tax experts: Please help me with the QBI deduction for rental proprites

You need to enter all three property separately. There will be different amounts of income and expenses, depreciation and amortization for each one of them. However, your income or looses will be combined together for the QBI purposes. 

manbeing
Level 3

Tax experts: Please help me with the QBI deduction for rental proprites

I did record each rental property individually in turbotax in terms of income, expense depreciation and etc.,  and actually my question was when Turbotax asked me if each rental property is qualified for the QBI deduction, can I select QBI deduction for the 1st and 2nd rental property (in one enterprise), and select NO QBI deduction for the 3rd property?

DianeW777
Expert Alumni

Tax experts: Please help me with the QBI deduction for rental proprites

It depends.  If you believe one of the rental properties is somehow different and doesn't rise to the level of a trade or business as defined next, then you can make a decision to exclude one property. However, if you are making the decision to increase your qualified business income deduction (QBID) without foundation, then you should include all or none.  See the information in the Revenue Procedure next.

 

Rental real estate does not always rise to the level necessary for the qualified business income deduction (QBID).  The second notice, produced by the IRS, defines more clearly about the safe harbor on page 5 of Revenue Procedure 2019-38 and helps you to understand the required record keeping to qualify for QBID.

  1. Select to Edit or Review beside each rental property > Scroll to LESS COMMON SITUATIONS > Select QBI
  2. You see the aggregation screen if you indicated that your taxable income might exceed certain levels. Otherwise, the "aggregation" screen does not appear. (It's not necessary to aggregate)
  3. If you do not select either safe harbor methods the next screen will ask you if this is qualified business income. If you select 'Yes' then TurboTax will do the calculations. 
    • Be sure to select and read the link "More Info about what's considered a qualified business" before you answer.
  4. See the images below.

View solution in original post

manbeing
Level 3

Tax experts: Please help me with the QBI deduction for rental proprites

@DianeW777 I have noticed that TurboTax provides two screens for the rental property QBI deduction for 2020 tax returning.

Just like you mentioned above, the first screen is about using the 2 Safe harbors to qualify for the QBI deduction. The second screenshot (also appeared in the previous year's turboxtax) is the QBI deduction w/o using the safe harbor.

If all of my three rental properties in the same nature, can I still use the 2nd screen (QBI without using the safe harbor) to determine the QBI deduction for each property individually and don't have to group them together in an enterprise ( on the 1st QBI screen using the safe harbor)?

 

Since I have two profitable rental properties and 1 profit-loss rental property, if I group them together in an enterprise and using the safe harbor (I was qualified for all the conditions in 2020), I found the QBI deduction is basically wiped away by the big loss from the 3rd rental property. 

 

the 1st screen for the QBI deduction using safe harbors.

1.jpg

the 2nd screenshot for the QBI without using the safe harbor:

2.png

DianeW777
Expert Alumni

Tax experts: Please help me with the QBI deduction for rental proprites

Yes, you can use the second screen without the safe harbor.  You should be prepared to make your case if it is ever questioned. Aggregation is not something you have to choose, and is a personal decision.

 

As far as selecting only the profitable properties, this is not the intent of the deduction. In other words you can't pick and choose each year based on the profit or loss of each property.  The real decision is based on whether the rental properties rise to the level of a trade or business and the safe harbor provisions. The negative figure does eliminate the deduction and the loss carries over to adjust the following year's QBI.

 

Here are some links with information that will help you decide.

manbeing
Level 3

Tax experts: Please help me with the QBI deduction for rental proprites

@DianeW777 Carrying over the loss to the following year's QBI is based on the that profit-loss property? or on the entire enterprise? The reason I am asking this question is I sold that profit-loss property in 2020 and I am not sure whether the loss can still be carried over.

 

Thanks!

DianeW777
Expert Alumni

Tax experts: Please help me with the QBI deduction for rental proprites

If you aggregate it will be the entire enterprise however, the property that is sold will allow any passive loss in the year of sale outside of the QBID aggregation.

 

Passive losses for a QBI business (from 2018 forward) will be tracked until the year the loss is included in taxable income. This is included in the Instructions for Form 8995-A.

 

You can "group" (or aggregate) your rental properties (treat them as a single enterprise) for the purposes of Section 199A (the QBI deduction).

 

See Rev. Proc. 2019-38 

 

You cannot "group" (or aggregate) your rental properties to avoid the passive activity loss rules unless you qualify as a real estate professional and grouping them would allow you to meet one of the material participation tests.

 

See Treas. Reg.  §1.469-9(g)(3)

 

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