Is My Rental Property QBI? What Every Landlord Should Know Before Filing Taxes
Is My Rental Property QBI? What Every Landlord Should Know Before Filing Taxes
Blog Article
If you own a rental property an of your most important tax questions to answer is my rental property qualified business income. If it does, you could be eligible for a significant tax deduction that can boost your profit. However, qualifying isn't automatic--it is contingent upon meeting specific IRS requirements.
Let's look at what the 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 income that is earned through the operation of a business or trade through a pass-through company. While rental property is traditionally considered passive income however, the IRS permits certain rental activities to qualify when they meet the requirements of a trade or business.
The IRS Business Test: Are You Operating Like a Business?
In order to be eligible to claim the QBI deduction the rental activity should be conducted in a manner that is consistent, regularity, and a profit motive. The IRS considers several factors when determining whether your rental qualifies as a business:
Active Management
You should be involved in the management of the property, making choices regarding repairs, tenant interactions, along with lease enforcement.
Recordkeeping
Keeping books and financial records as well as tracking expenses and managing income are all signs of the seriousness of business.
Operational Structure
The presence of business systems like routine maintenance schedules, tenant onboarding and the use of service suppliers, supports business classification.
Use of the Safe Harbor Rule
The IRS has introduced a safe harbor rule to make the qualification clearer. If your rental enterprise:
Maintains separate records and books, and
Completes 250 hours or more of rental services annually and
Keeps a record of hours, dates, and activities,
...then it is generally treated as an enterprise to be used for QBI reasons.
This safeguard applies to every business individually or collectively when 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
Rent collection and bookkeeping
Coordination with professionals in the field of service
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 rentals with regular turnover of the tenant
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 guidelines, and particularly the safe harbor rules, you can position your rental activity to be able to qualify for the threshold of business. If you do it correctly, this can lead to substantial tax savings year after year.