Question about QBI safe harbor

[superlyc]

Hi, I am TurboTax ask me if I am eligible for the QBI safe harbor. One of the condition that I must met is Performed 250 hours or more in rental services across all properties (by you or hired workers)
I hired a management agent to do this work for me. According to some online information, they is considered as "hired workers". How should I know prove that 250 hours then? 

Thanks in advance

[Mike9241]

This is the issue I see in claiming the QBI safe harbor, especially when using a management company. It's logical to assume they would hire whoever is needed to perform repairs, maintenance, and other work on the property. Whether they get the info in note A is unknown. Talk to them to see what they can provide. 

 Maintain contemporaneous records

The IRS requires you to document services as they occur—the hours, description of services, dates, and who performed the services—not recreating them at the end of the year. Here are some tips to meet this requirement:

• Keep detailed notes for each property or building
• Include dates, type of activity, and time spent (note A)

Attach the annual statement election

To formally elect Safe Harbor treatment, you must attach a statement to your tax return each year, signed by the owner or representative. You can’t elect the Safe Harbor on an amended return unless you have a valid reason for the initial omission.

The statement must include:

• A description (including the address and rental category) of all rental real estate properties included in each RREE.
• A representation that the requirements regarding separate books and records, the 250-hour rule, and contemporaneous records have been met.
• A signature by the taxpayer (or an authorized representative) declaring under penalties of perjury that the statement is true.

Here's an example that I think meets the rule for contemporaneous records. You hire a landscaper for a property. At the end of each month, a bill is submitted with the hours notated. 

[PatriciaV]

You should require that all contractors provide evidence of the work they perform and the number of hours they spend working on your rental property. Most professionals in the rental industry understand this requirement and should have processes in place to provide the documentation you need.

For your personal hours, keep a record of all the following:

• advertising to rent or lease the real estate;
• negotiating and executing leases;
• verifying information contained in prospective tenant applications;
• collection of rent;
• daily operation, maintenance, and repair of the property, including the purchase of materials and supplies;
• management of the real estate; and
• supervision of employees and independent contractors.

[superlyc]

@Mike9241

 Thanks. "Attach the annual statement election", but Turbox did not ask me to do this? I assume that TurboTax should have me handle all the documents. I am confused here.

[superlyc]

@PatriciaV 

The management company do all the advertising and negotiation stuff. They like a company, people there work full time to handle all their clients' properties during the year. Is there a typical name for the document, otherwise I hardly believe a company like this kept record on how much time they spent on for each of their client. 
How is this practically handled?

[PatriciaV]

Note that you have the option to answer "No" to the Safe Harbor question. You will then be asked if your rental is considered a trade or business. If you answer Yes to this question, the rental income will be included in the QBI calculation. 

As Expert DanielV01 mentioned, "While the IRS can certainly question any claim regarding QBID, in general, the more "profit-motive" is shown in the enterprise, the more likely that the enterprise will be allowed for the Section 199A deduction. This is especially so with regards to rental income to determine if such rises to the level of a business per Section 162 of the tax code. (The preceding statement is tax advice and not legal advice)."

If you decide to use the Safe Harbor election, your best option is to contact the management company and explain what you need. While there may not be a standard name for the report, they should be aware of the IRS requirement to document their work for your rental property.

To add the Annual Election Statement to your return, you would need to transfer your TurboTax Online return to TurboTax Desktop. (TurboTax Online does not support creating attachments.) See the instructions here: How do I switch from TurboTax Online to the TurboTax software?

Once you have switched to TurboTax Desktop, open your return and click the Forms icon in the TurboTax header. In the left column, click Open Form, then type in "Blank Form." Click on the form to open it in the large window. You can now type in the statement you need to include with your return, per Mike9241's previous post.

[superlyc]

@PatriciaV Thanks. I reached out to management company and they do not track hours for individual properties. So I decide not to go with QBI safe harbor. But I can still choose Yes to QBI income on the next page, right?  In this case, do I need the Annual Election Statement? Is it for QBI safe harbor only?

In addition, since my net rental income is negative, does it matter I choose QBI income or not? It will not affect my return this year, what about the future years?

thanks

[PatriciaV]

You are correct. If you answer No to the Safe Harbor election, you may then answer Yes that it is QBI. You would not need the Annual Election Statement in this case.

QBI losses carry over to future years, so it's best to indicate that the activity is QBI even when you have a loss.

[superlyc]

It seems only QBI gain gave me more refund, what benefit do I get to track this loss into future years? 

[PatriciaV]

The QBI loss carryforward is required by the IRS. See IRS Instructions for Form 8995 Line 4.

[superlyc]

@PatriciaV 

 Thank you. But the thing is I read this from TurboTax pop up window "There is considerable uncertainty about whether a small-scale, long-term rental of a single property or small number of properties is a "trade or business." 

So it seems either I choose Yes or No to this question, it does not affect the amount of return. So, is it better/safer just say "No"?

[PatriciaV]

That is your choice to make. If you run your rental properties as a business and have documentation to support that belief, you could say the income is QBI. But you must be prepared to defend your position. If QBI has no material effect on your taxable income, it's probably safer to skip QBI for your rental.