I converted my personal residence to rental property in Jul/2022. I use a property management company to advertise and manage the rental. Is this eligible for QBI safe harbor?
I am specificaly confused if the below criteria meets in my case
- Performed 250 hrs or more in rental services. Does this apply to me since I worked with a property managment company?
- Kept separate records for income and expenses - I have a document from the property management company that shows my total income and expenses. Does that apply?
- Didnt use it as your residence - This was my personal residence for part year or is this referring to using it as residence after it was converted to rental?
Conditions to qualify for the QBI safe harbor
To take the QBI safe harbor, you must have:
For a single property
1. Performed rental services for at least 250 hours (you or someone you hired) - include the time spent by the management company
2. Kept separate books and records showing income and expenses - if you have separate records of the income and expenses of the rental property, you meet this objective
3. Didn't use it as your residence - AFTER you converted it to a rental
4. Didn't lease the property under a triple net lease
5. Didn't rent the property to a commonly controlled business
The conditions are set to qualify a rental property as a business instead of an investment. For rental properties, the distinction between investment and business is difficult to discern.
For example, you could be operating one rental as a business, but if you have a steady tenant, you'll likely not spend much time working on that property, probably not 250 hours. In this situation, your rental would be considered an investment (you earn money without much effort or activity).
Owners of multi-tenant properties or many properties will more likely qualify as a business. For example, an owner of a multi-tenant building would likely hire people to move tenants in and out of rentals and maintain the property, quickly adding up to 250 hours.
What's the difference between QBI safe harbor and QBI?
The five criteria for the safe harbor are another way of qualifying your rental property as QBI that lowers your audit risk.
You can also qualify for QBI with other criteria without taking the safe harbor. In fact, if you select No on that screen, we'll ask if you'd like to qualify as a business next. That qualification is easier to get but more open to audits by the IRS; you lose the safe part of the safe harbor.