What is the difference between being eligible for QBI with and without safe harbor?

[lameri]

Last year I learned from a TurboTax employee who helped me on the phone that since 2018 rentals can be treated as qualified business income.

This year I have carefully read the instructions on TurboTax and I see that even if privately owned rental owners don't qualify for the QBI safe harbor (they usually don't need 250 hours of work), they tend to qualify for QBI ("regularity, continuity, and a profit motive").

Now I read this IRS article and it seems to imply that "safe harbor" was introduced to allow real estate to be included, do they mean for professionals to be able to include it? If it is so, I understand this other wording that I found in the TurboTax help: "If a safe harbor is elected, the IRS will not question the treatment of a rental activity as a business." So I guess "safe harbor" helps real estate businesses not need to explain they are a "business or trade."

But I do wonder: Most people who rent out privately do it for profit, so I am not sure who would not qualify for QBI without the safe harbor. TurboTax gives examples of renting out without really caring about the property, for example, letting the renter modify it or not being involved in the property owned. Any other cases?

Thanks.

[ColeenD3]

Rental activities are passive activities. They are not considered a business unless you are a real estate professional.

However, certain provisions have been made over time that allows landlords special treatment. One is the special allowance that lets you deduct up to $25,000 against ordinary income. Another is the QBI deduction.

On September 24, 2019, the IRS issued Revenue Procedure 2019-38 (Rev Proc 2019-38). This revenue procedure provides a safe harbor under which income from rental real estate will be QBI.

199A Applied to Real Estate Investments

Under Section 199A rental of real estate is treated as a trade or business provided the owner is an individual. Most of the time, real estate qualifies under Section 199A if the primary purpose for engaging in real estate rental is for income or profit.

Corporations and partnerships aren’t eligible for the Section 199A deduction on their tax returns. However, the shareholders of an S corporation or the partners of a partnership (or limited liability company taxed as a partnership) may be eligible for the deduction,

This article discusses the Rev Proc 2019-38 safe harbor. General discussion of Section 199A and specifics regarding its application to real estate investments are beyond the scope of this article.

Safe Harbor Requirements

The Rev Proc 2019-38 includes these requirements:

1. The taxpayer must hold its interest in real estate either directly or through a disregarded entity.
2. The taxpayer must be engaged in a rental real estate enterprise (RREE).
3. In three of the previous five years, 250 or more hours of rental services per year must have been performed for the RREE. If the RREE hasn’t yet existed for five years, then there must have been 250 or more hours of rental services performed every year since it was formed.
4. The RREE must maintain separate books and records. If the RREE owns multiple properties, it may maintain records at the property level and consolidate them at the RREE level.
5. The taxpayer annually elects to rely upon the safe harbor, and the taxpayer or RREE attaches a statement to its tax return containing specific information.

[lameri]

From the TurboTax menu, the first question for a rental is:

"Do you want to use a safe harbor to qualify this property for a deduction?

Yes...

No...

Note: A property that does not meet a safe harbor may still be a qualified trade or business eligible for deduction."

After a "no" there, the next menu takes you to "Is this Qualified Business Income?" And in there, the explanation is "In general, if rental or royal activity is based in the U.S. and carried on with regularity, continuity, and a profit motive, then income from this activity is considered Qualified Business Income (QBI)."

So I still don't see that most non-professional rental owners (that act as landlords) would respond "no" to that second menu (Is this Qualified Business Income?).