Is a Rental Property Considered Qualified Business Income? Key IRS Criteria Explained

Is a Rental Property Considered Qualified Business Income? Key IRS Criteria Explained

Blog Article

Rental property investing is a popular strategy for making money, and one of the most powerful instruments is a rental property qualified business income. However, not all rental businesses qualify automatically. To claim the deduction, landlords must demonstrate that their property qualifies as a trade or business under IRS guidelines.

Here's a step-bystep guide for finding out if your rental property is eligible for this tax benefit.



Step 1: Understand the QBI Deduction Basics

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



Step 2: Evaluate Your Rental Activity

Do you have the following questions in mind?

Do you manage or supervise the property?

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

Do you keep a record of your financial record?

Is the property designed to generate long-term income?

If you answered yes to a majority of these questions, 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 provides the safety harbor requirement. To qualify in this way:

Your rental business should involve 250 hours or more of rental service per year.

Keep detailed records of the time you worked as well as dates and the type of work you have done.

Records and books are required for every rental event.

This makes it simpler for landlords to prove their business activities.



Step 4: Track Rental Services

The IRS define rental services broadly. Activities that qualify are:

Tenant communication and screening

The lease is prepared and renewed.

Repair and maintenance scheduling

Bookkeeping and expense tracking

Supervising contractors or property managers

Whether you handle it personally or assign tasks to others the services you provide count towards the 250-hour requirement.



Step 5: Group Properties Wisely

If you have multiple rental properties, you can choose to group similar properties into a single business. This makes it easier to track and allows you to meet the hour threshold easier. The grouping should be consistent every year, so make sure to consult an expert before making any changes.



Step 6: Work With a Tax Advisor

After reviewing your actions and documentation, speak with a tax professional to confirm eligibility. Making sure you have the proper documents and records will guarantee the deduction is applied correctly.



Conclusion

This QBI deduction is among the most powerful tools available for property owners with rental properties. However, only if your property is categorized as a business. By proactively managing your rentals by documenting your services and adhering to the safe harbor guidelines to gain this benefit. By following the right steps your investment in rental properties will be more lucrative when it comes to tax time.