Rental Real Estate QBI Safe Harbor - 2021 - CPA Clinics
For tax years 2018 through 2025, you may be able to deduct up to 20% of qualified business income (QBI) from each of your qualified trades or businesses, including those operated through a sole proprietorship, or a pass-through entity, such as a partnership, LLC, or S corporation.
In general, income from rental real property held for investment purposes and reported on Schedule E (Form 1040) is not eligible for the QBID. However, you may be eligible for the QBID if you are operating the activity as a real estate business.
There is uncertainty for some as to whether rental real estate qualifies as a trade or business for purposes of the QBID. The IRS has provided a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of the QBID.
Note: The rental or licensing of tangible or intangible property to a related trade or business qualifies if both businesses are commonly controlled.
Solely 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 and may consist of an interest in multiple properties. That is, you may own just one rental property or multiple rental properties that could potentially qualify as a rental real estate enterprise.
You or the relevant pass-through entity (RPE) such as a partnership or S corporation, relying on the safe harbor must hold the interest directly or through an entity disregarded as separate from its owner, such as a limited liability company (LLC).
You must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rents as a single enterprise. However, commercial and residential real estate may not be part of the same enterprise. Once you chose to combine or keep properties separate, you may not vary this treatment from year-to-year unless there has been a significant change in facts and circumstances.
Solely for purposes of the QBID, your rental real estate enterprise will be treated as a trade or business under the safe harbor, if all of the following requirements are satisfied during the tax year.
– Description of all services performed,
– Dates on which such services were performed, and
– Who performed the services.
Rental services. For purposes of the safe harbor, rental services include the following activities.
Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners.
The term rental services does not include financial or investment management activities, such as arranging financing, procuring property, studying and reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements, or hours spent traveling to and from the real estate.
