How to Determine if Your Rental Property Qualifies for the Business Income Deduction
How to Determine if Your Rental Property Qualifies for the Business Income Deduction
Blog Article
If you are a property owner who owns a rental, one of the most important tax questions to answer is a rental property qualified business income. If this is the case then you may qualify for a significant tax deduction that can boost your profits. But, it's not automatic. It requires meeting specific IRS guidelines.
Let's break down what the IRS will be looking for to determine if rental activity counts as an enterprise for the purposes of QBI.
Understanding QBI in a Rental Context
Qualified Business Income refers the net earnings earned from an enterprise or trade that is operated through a pass-through company. Although rental properties are traditionally classified as passive income, the IRS permits certain rental activity to be eligible in the event that they are in line with the standards of a business or trade.
The IRS Business Test: Are You Operating Like a Business?
To qualify to take advantage of the QBI deduction, your rental activities should be conducted in a manner that is consistent with regularity and profit purpose. The IRS takes into consideration a number of factors when determining whether your rental qualifies as a business:
Active Management
You must be involved in managing the property and making choices regarding maintenance, interaction with the tenant, and lease enforcement.
Recordkeeping
Maintaining financial records and books keeping track of expenses, as well as managing income are all signs of the seriousness of business.
Operational Structure
The presence of business systems, such as regular maintenance programs, tenants onboarding and the use of service providers, supports business classification.
Use of the Safe Harbor Rule
The IRS has created a safe harbor rule to clarify the meaning of the term. If your rental enterprise:
Maintains separate books and records and
Performs at least 250 hours of rental services per year, and
Keeps a record of hours, dates, and activities.
...then it can generally be classified as an enterprise to be used for QBI purposes.
This safeguard applies to each enterprise separately, or collectively if similar properties are combined.
What Activities Count as Rental Services?
The rental services covered by the rule of safe harbor comprise:
Advertising and tenant screening
Renewal and lease negotiation
Repairs and maintenance to the property
Bookkeeping and rent collection
Coordination with professionals in the field of service
Even if you employ others to help you, the hours still count--just be certain that the assistance is related to the rental.
Common Situations That Qualify
Multiple properties, and managing them actively
Short-term rentals that have regular turnover of tenants
Long-term rentals with continuous improvements and management involvement
Conclusion
Whether or not your rental income qualifies for the QBI deduction is contingent upon how you run your operation. By understanding the IRS standards--and especially the safe harbor rules, you can ensure that your rental activities are set in a way that it meets the threshold for business. If done correctly, this can lead to substantial savings in taxes each year.