Is Your Rental Property QBI-Eligible? A Landlord’s Tax Checklist
Is Your Rental Property QBI-Eligible? A Landlord’s Tax Checklist
Blog Article
As a rental property owner among the important tax issues to address qualified business income deduction rental property. If it is then you may be eligible for a substantial tax deduction that can boost your profit. But, it's not automatic. It requires meeting specific IRS guidelines.
Let's take a look at what 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 to the net earnings earned from an enterprise or trade that is operated through a pass-through company. While rental properties are typically considered to be passive income however, the IRS allows certain rental activities to qualify when they meet the requirements of a business or trade.
The IRS Business Test: Are You Operating Like a Business?
In order to be eligible for the QBI deduction Your rental business must be conducted with continuity regularity, consistency, and a profit motivation. The IRS examines a variety of aspects when determining if your rental is an enterprise:
Active Management
You'll need to be involved in managing the property and making decisions on maintenance, interaction with the tenant, along with 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 existence of business-related systems including regular maintenance plans, onboarding of tenants, and the use of service providers which support the classification of business.
Use of the Safe Harbor Rule
The IRS has created a safe harbor rule to make qualification clearer. If your rental enterprise:
Maintains separate records and books as well as
Performs 250 hours or more of rental service per year, and
Keeps track of times, dates and activities.
...then it is generally considered a business to be used for QBI purposes.
This protection applies to each enterprise separately or in a group if similar properties are put together.
What Activities Count as Rental Services?
Rental services under the rule of safe harbor consist of:
Advertising and tenant screening
Lease negotiation and renewals
Property repairs and maintenance
Bookkeeping and rent collection
Coordination with Service professionals
Even if you hire others to help, these hours are still counted. Just make certain that the assistance is related to the rental.
Common Situations That Qualify
Multiple properties, and managing them actively
Short-term rentals with regular turnover of the tenant
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 to be eligible for the QBI deduction depends on how you run your business. If you are aware of IRS standards--and especially the safe harbor rule, you can position your rental activity in a way that it meets the threshold for business. If done correctly this could result in significant savings in taxes each year.