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-related questions to be answered is a rental property qualified business income. If it does qualify, you could be eligible for a substantial tax deduction that boosts your profits. However, obtaining the tax deduction isn't an automatic process. requires meeting specific IRS guidelines.
Let's break down what the IRS looks for when determining whether rental activities count as a business within the meaning of QBI.
Understanding QBI in a Rental Context
Qualified Business Income refers to the net income earned from a trade or business operated as a pass-through entity. While rental property is traditionally considered to be passive income however, the IRS permits certain rental activity to qualify in the event that they are in line with the standards of a trade or business.
The IRS Business Test: Are You Operating Like a Business?
In order to be eligible to take advantage of the QBI deduction, your rental activities must be conducted with continuity, regularity, and a profit purpose. The IRS takes into consideration a number of factors in determining whether your rental is a business
Active Management
You'll need to be involved in managing the property, taking decisions about maintenance, interaction with the tenant, as well as lease compliance.
Recordkeeping
The keeping of financial and bookkeeping records as well as tracking expenses and controlling income is a an active business.
Operational Structure
The existence of business-related systems like routine maintenance schedules, tenant onboarding, and the use of service providers that support business classification.
Use of the Safe Harbor Rule
The IRS has introduced a safe harbor rule to clarify the meaning of the term. If your rental enterprise:
Maintains separate records and books, and
Provides 250 hours or more of rental service per year and
Keeps a log of hours, dates, and other activities.
...then it is generally treated as an enterprise in the eyes of QBI purposes.
This safeguard applies to every business individually or collectively when similar properties are put together.
What Activities Count as Rental Services?
Rental services under the rule of safe harbor comprise:
Screening and advertising for tenants
Lease negotiation and renewals
Repairs to property and maintenance
Bookkeeping and rent collection
Coordination with service professionals
Even if you hire others to help you, the hours still count--just be sure the services relate to the rental activity.
Common Situations That Qualify
Owning multiple properties and managing them actively
Short-term rental with regular turnover of tenants
Long-term rental with continuous improvements and management involvement
Conclusion
The question of whether or not the rental income you earn is eligible for the QBI deduction depends on how you manage your business. By knowing the IRS guidelines--and specifically the safe harbor rules, 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.