QBI Deduction for rental real estate tax savings.

If you own a rental property that qualifies for the Qualified Business Income Deduction, it allows you to deduct as much as 20% of the rental profit on your taxes.

When the 2018 tax changes first came out, the rules for treating rental real estate income as qualified for the QBI deduction were vague.  However, the IRS has published more defined rules, which are very important to know if you own a rental property and want to benefit from the tax savings of claiming the QBI deduction.

Owners of rental properties are required to spend 250 hours or more of their time to qualify for the QBI deduction.  According to the IRS, these hours include services performed by owners, employees, independent contractors and time spent on maintenance, rent collection, payment of expenses, provisions to tenants, and efforts to rent the property.

The IRS has recently issued a revenue procedure that provides a safe harbor for taxpayers, which explains the requirements for treating a rental real estate enterprise as a business for the purpose of the 20% qualified business deduction of Sec. 199A. (Rev. Proc. 2019-38)

For purposes of the safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents.

A rental real estate enterprise may comprise multiple properties.  The taxpayer must treat each property held for the production of rents as a separate enterprise or must treat all similar rental properties as a single enterprise.  Commercial and residential real estate properties are not eligible to be combined into the same enterprise.

Taxpayers whose real estate activity does not meet the safe harbor may still be able to qualify as a trade or business if it meets the definition under the Sec 199A regulations.

The safe harbor requires that separate records be maintained for each rental real estate enterprise.

Beginning Jan 1, 2020, the safe harbor requires the taxpayer to keep “contemporaneous records.” Consequently, the records used to support the claim of your time may not be created at a later date. 

The taxpayer’s records, including time reports, logs, or similar documents regarding the following: description of all services performed, hours for all services performed, dates on which those services were performed, and who performed the services.

By keeping a record of the total hours spent on the rental property, you will know if you are close to the 250 hours required as the end of the year approaches.  If you have a little less than 250 hours, you may want to spend some time performing extra maintenance to the property at the end of the year in order to take advantage of the QBI tax savings.

David Zubler is a tax accountant in East Tennessee, the author of four books, and a philanthropist.  All of his proceeds from the books go to a charitable foundation he created for underprivileged children.  He is also the founder of Your Tax Care which provides tax education. David can be reached for questions and consultation at yourtaxcare.com.