Is a Rental Property Qualified Business Income? Factors That Affect Eligibility

Is a Rental Property Qualified Business Income? Factors That Affect Eligibility

Blog Article

Investment in rental property is a popular strategy for creating wealth. One of the most powerful methods qualified business income deduction rental property. But not all rental activities qualify automatically. To claim the deduction, landlords must prove that their property qualifies as an industry or trade according to IRS guidelines.

Here's a step-by-step guide to finding out if the rental property you own qualifies for this valuable tax break.



Step 1: Understand the QBI Deduction Basics

The QBI deduction allows for a deduction of 20% on net business earnings for qualified commercial activities. Although initially targeted at sole proprietors and small-business owners, real estate rental may also be eligible, provided it is operated as a business.



Step 2: Evaluate Your Rental Activity

Ask yourself the following:

Do you manage or oversee the property?

Are you responsible for the maintenance of your property, lease, or relations with tenants?

Do you keep a record of your financial documents?

• Is your property designed to provide long-term income?

If you answered yes to a majority of these questions, then your rental activity may be treated as business.



Step 3: Consider the Safe Harbor Rule

To ease the process of obtaining a qualification to make it easier for applicants, the IRS offers the safe harbor rule. To be eligible in this way:

Your rental business should involve 250 hours or more of rental services annually.

Keep detailed records of the time you worked on specific dates, as well as the types of work you have done.

Records and books are required for every rental operation.

This law makes it much easier for landlords to prove their business activities.



Step 4: Track Rental Services

The IRS defines rental services broadly. The activities that are eligible include:

Tenant communications and screening

Lease preparation and renewals

Repair and maintenance scheduling

• Bookkeeping, expense and time tracking

Supervising contractors and property managers

If you manage it yourself or delegate the task they count towards the 250-hour minimum.



Step 5: Group Properties Wisely

If you have multiple rental units, you may decide to combine similar properties together into one enterprise. This will make it easier to track them and help reach the hourly threshold more easily. Grouping must be consistent each year, so make sure to consult an expert before making any changes.



Step 6: Work With a Tax Advisor

Once you've reviewed your activities and documentation, speak with an expert tax advisor to confirm your eligibility. Making sure that you file the correct documents and records will guarantee that the deduction is properly applied.



Conclusion

The QBI deduction is among the most effective tools available for rental property owners--but only if your property is categorized as a business. By actively managing your rentals, documenting services, and adhering to the safe harbor guidelines to gain this valuable advantage. If you follow the correct approach your investment in rental properties are likely to be even more profitable at tax time.