Is a Rental Property Qualified Business Income? Factors That Affect Eligibility
Is a Rental Property Qualified Business Income? Factors That Affect Eligibility
Blog Article
If you own a rental property, one of the most important tax-related questions to be answered qualified business income deduction for rental property. If it does, you could be eligible for a significant tax deduction, which can increase your profitability. But, it's not automatic. It requires meeting specific IRS guidelines.
Let's take a look at what IRS is looking for when determining if rental activity counts as a business for the purposes of QBI.
Understanding QBI in a Rental Context
Qualified Business Income is the net income earned from an enterprise or trade that is operated as a pass-through entity. While rental property is traditionally considered to be passive income, the IRS permits certain rental activity to be considered qualified if they meet the standard of a trade or business.
The IRS Business Test: Are You Operating Like a Business?
To be eligible to claim the QBI deduction the rental activity must be carried out with consistency regularity, consistency, and a profit motivation. The IRS considers several factors when determining whether your rental qualifies as a business:
Active Management
You'll need to be a part of managing the property and making decisions on repairs, tenant interactions and lease enforcement.
Recordkeeping
Maintaining financial records and books, tracking expenses, and controlling income is a serious business activity.
Operational Structure
The existence of business-related systems, such as regular maintenance schedules, tenant onboarding, and the use of service suppliers which support the classification of business.
Use of the Safe Harbor Rule
The IRS has introduced a safe harbor rule to make qualification clearer. If your rental enterprise:
Maintains separate records and books and
Performs 250 hours or more of rental service per year and
Keeps a log of hours, dates, and activities,
...then it is generally considered an entity for QBI purposes.
This protection applies to each enterprise separately or in a group if similar properties are combined.
What Activities Count as Rental Services?
The rental services covered by the Safe Harbor rule comprise:
Screening and advertising for tenants
Renewals and lease negotiation
Repairs to property and maintenance
Bookkeeping and rent collection
Coordination with professionals in the field of service
If you do hire other people to help, these hours are still counted. Just make sure that the services are related to the rental.
Common Situations That Qualify
Owning multiple properties and actively managing them
Short-term rental with regular turnover of tenants
Long-term rentals with regular improvements and involvement from management
Conclusion
The question of whether or not your rental income qualifies for the QBI deduction depends on how you run your operation. By understanding the IRS guidelines--and specifically the safe harbor rules, you can ensure that your rental activities are set to meet the business threshold. If done properly it can result in significant tax savings every year.