QBI safe harbor on rental net loss

[nyencTaxFiler]

Hello tax gurus - Me and my wife have income

1. over 600k(active employment)

2. have rental income(180k per year) due to 6 properties but still a net loss due to depreciation. 180k - depreciation of properties = loss

I also active participant in real estate and spend over 250 hours managing properties. Should I use QBI safe harbor for item 2 above in turbotax? Or should I even opt it is QBI for item 2 above in turbotax?

So doesn't seem to help much now for this year or for carry forward. Not sure doing above hurts. Help me with your suggestion.

[KarenL4]

Hi, NYenctaxfiler,

To access the Section 199A Trade or Business Safe Harbor: Rental Real Estate you need to be more than an active participant. IRS Notice 2019-07 details the requirements and this Intuit article does a great job of summarizing it.

While there are exclusions listed in the article (and the notice), you can qualify for the safe harbor if you are a real estate professional (see requirements below) or you otherwise qualify.  Here are those requirements.

Be a real estate professional for tax purposes (that is, over 50% of the personal services you performed in business during the tax year were in a real estate business you materially participated in for more than 750 hours that same year) then your rental income qualifies for the QBI deduction, provided all the other conditions are met.

OR

IF NOT A REAL ESTATE PROFESSIONAL: What if you own a rental — or three — but don’t qualify as a real estate professional? Turns out you can qualify for the QBI deduction, as long as your rental activities constitute a trade or business.

Generally, this means each rental real estate enterprise (a rental property or group of similar rental properties, including K-1 rental income) must satisfy these three requirements:

1. Each enterprise maintains its own books and records to track income and expenses
2. At least 250 hours of rental services are performed per year per enterprise
3. (Starting with tax year 2019) Contemporaneous records of services performed are kept which includes who performed the service, description of service, the date of the service, and how long it took (who, what, when, and how long)

Rental services can be performed by the owners or by their employees, independent contractors, or agents, and would include things like:

• General operation, maintenance, and repair of the property
• Purchasing materials
• Property management activities
• Supervising employees and contractors
• Advertising the property for rent
• Tenant selection and background checks
• Negotiating and executing leases
• Collecting and depositing rent

Activities excluded from the definition of rental services include:

• Time spent traveling to and from the property
• Reviewing financial statements or operational reports
• Financial or investment management (for example, financing)
• Procuring or acquiring property to rent
• Planning, managing, or constructing long-term capital improvements

Please note that if a rental fails to satisfy these requirements, the enterprise could still be treated as a qualified trade or business for the purposes of the QBI deduction, provided it meets the definition of a trade or business under IRC § 162.

There isn't enough info in this question to be certain if you meet the QBI safe harbor. Hopefully, this information will help you decide.

Please cheer by clicking the thumb icon in a post, and if this answers your question, select “Mark as best answer.”

Best,

Karen

[nyencTaxFiler]

Thanks for the reply.

I do qualify for QBI safe harbor, that's not my question. The question have is, would it be making sense for me to use that option of QBI safe harbor, since I am not have net income on rentals but net loss due to depreciation on my rental properties as mentioned in my question. 

[nyencTaxFiler]

Would I save money if I use QBI safe harbor given my net loss is my question.

[Mike9241]

you would have a QBI loss caryover which would be used to offset future years' QBI income. so your net QBI deduction could be reduced in the future. However, the QBI deduction is set to expire in 2025 unless Congress renews it.  another question is say you have income from rental in the future. could you argue you can elect safe harboer in that year to take the deduction having passed on it in loss years.  safe harbor only means if you meet the criteria the IRS can't challenge it. the reverse is not true. Depending on facts and circumstances the IRS could are you had QBI losses even though you didn't meet the safe harbor criteria.   so it's really your choice.