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 crucial tax questions to answer is my rental property qualified business income. If it does qualify, you could be eligible for a substantial tax deduction that can boost your profit. However, obtaining the tax deduction isn't an automatic process. requires meeting specific IRS guidelines.
Let's take a look at what 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 is the income that is earned through an enterprise or trade that is operated through a pass-through company. While rental property is traditionally considered passive income however, the IRS allows certain rental activities to be eligible 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?
To qualify for the QBI deduction Your rental business must be carried out with consistency regularity, consistency, and a profit purpose. The IRS considers several factors in determining whether your rental qualifies as an enterprise:
Active Management
You'll need to be involved in the management of the property and making choices regarding repair, interactions with tenants along with lease enforcement.
Recordkeeping
Keeping books and financial records 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 routine maintenance programs, tenants onboarding and 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 clarify the meaning of the term. If your rental enterprise:
Maintains separate books and records, and
Provides at least 250 hours of rental services per year and
Keeps a log of times, dates and activities.
...then it can generally be considered an entity in the eyes of QBI purposes.
This protection applies to every business individually or collectively when similar properties are grouped together.
What Activities Count as Rental Services?
The rental services covered by the Safe Harbor rule comprise:
Tenant screening and advertising
Renewal and lease negotiation
Repairs and maintenance to the property
Bookkeeping and rent collection
Coordination with professionals in the field of service
Even if you employ others to assist, the hours still count--just be certain that the assistance is related to the rental activity.
Common Situations That Qualify
Owning multiple properties and actively managing them
Short-term rentals that have 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 to be eligible for the QBI deduction depends on how you run your operation. By understanding the IRS standards--and especially the safe harbor rules, you can set your rental business in a way that it meets the threshold for business. If done correctly this could result in significant tax savings each year.