Reviewing Your Rental Operations to Meet Qualified Business Income Requirements
Reviewing Your Rental Operations to Meet Qualified Business Income Requirements
Blog Article
Tax code compliance can be challenging, especially when dealing with income earned from rental properties. One question many owners of property have to answer is my rental property qualified business income deduction. The tax break, which was introduced under the Tax Cuts and Jobs Act allows up to 20% deduction for qualified income. But it is not the case for every rental business. Making sure your rental operation is properly assessed is vital for compliance and to get the most tax benefits.
In the beginning, it's essential to know the underlying principles of this QBI deduction. It's targeted primarily at those who earn business income through the business or trade as defined in Section 162 of the Internal Revenue Code. The IRS does not automatically consider renting as a trade or business. That means you need to examine how your property is managed and the amount of involvement it requires to determine eligibility.
The most important aspect is the frequency and ongoing activity in running the business. If you're actively involved--marketing the property, managing maintenance, screening tenants, collecting rent and archiving books, your business could reach the degree of a trade business. Passive ownership with minimal involvement, on the other hand typically, does not reach the requirements.
In 2019, the IRS issued a safe harbor rule that will provide a clearer pathway to eligibility. If a taxpayer meets specific conditions, their rental activity is regarded as a trade or business to qualify for QBI purposes. This includes keeping separate books and records for each rental company and spending a minimum of 250 hours annually in rental services, such as repairs, tenant communication as well as lease administration. These hours can be performed by the proprietor or other individuals, such as property managers.
Documentation is key. If you're in the safety harbor keeping complete and accurate records is crucial. This includes timesheets, records of activity related to property invoicing, contracts, and invoices. Without clear and precise documentation, it becomes harder to establish that your rental is eligible, especially in the event the need for an audit.
Additionally, property grouping can affect eligibility. If you have multiple rental properties, you can choose to treat them as an entity in one for QBI purposes, assuming they meet the safe harbor standards together. This strategy can be advantageous when the amount of time you spend on properties collectively exceeds the threshold.
It's important to recognize that personal property or rental under the triple net lease typically does not qualify. Similarly, properties held for investment without regular engagement don't meet the criteria for a trade or business.
In short, determining whether your rental business is eligible for the QBI deduction requires an in-depth examination of how the property is run, the time invested, and how the records are kept. If you actively manage your rentals with a hands-on approach, and your processes are documented it is possible that you are able to benefit from this important deduction.
One question many property owners face is my rental property qualified business income deduction. Read more to get more information about is a rental property qualified business income.