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 rental property. If it is then you may qualify for a significant tax deduction that can boost your profitability. However, qualifying isn't automatic--it is contingent upon meeting specific IRS guidelines.
Let's break down what the IRS is looking for when determining if rental activity counts as a business within the meaning of QBI.
Understanding QBI in a Rental Context
Qualified Business Income refers the net earnings earned from the operation of a business or trade through a pass-through company. While rental properties are typically classified as passive income however, the IRS permits certain rental activities 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 the rental activity must be conducted with continuity with regularity and profit purpose. The IRS considers several factors when determining whether your rental qualifies as a business:
Active Management
You'll need to be involved in managing the property, taking decisions on repair, interactions with tenants, as well as lease compliance.
Recordkeeping
Keeping books and financial records as well as tracking expenses and managing income are all signs of an active business.
Operational Structure
The presence of systems for business including routine maintenance plans, onboarding of tenants and the use of service providers, supports business classification.
Use of the Safe Harbor Rule
The IRS has implemented a safe harbor policy to clarify the meaning of the term. If your rental enterprise:
Maintains separate records and books and
Completes at least 250 hours of rental services annually, and
Keeps a record of dates, hours, and other activities.
...then it could be classified as a business to be used for QBI purposes.
This protection applies to every business individually, or collectively if similar properties are grouped together.
What Activities Count as Rental Services?
The rental services covered by the safe harbor rule consist of:
Screening and advertising for tenants
Renewal and lease negotiation
Repairs to property and maintenance
Bookkeeping and rent collection
Coordination with Service professionals
If you do hire other people to help you, the hours count nonetheless. Just be sure that the services are related to the rental.
Common Situations That Qualify
Owning multiple properties and managing them actively
Short-term rentals with regular turnover of tenants
Long-term rentals that are subject to regular improvements and involvement from management
Conclusion
The question of whether or not your rental income is eligible for the QBI deduction is contingent upon how you manage your business. By understanding the IRS guidelines--and specifically the safe harbor rule, you can set your rental business to meet the business threshold. If done correctly, this can lead to significant savings in taxes year after year.