Understanding the Business Classification of Rental Income Activities
Understanding the Business Classification of Rental Income Activities
Blog Article
When managing rental properties the first thing landlords must consider is whether the business's activity rises to the level of a trade or business. This distinction can have huge implications, particularly for tax purposes, such as is a rental property qualified business income. Knowing where your rental business stands requires looking at several practical and operational factors.
To start, there is no singular standard that defines rental activity as a business. It is based on the particular facts and circumstances of each instance. The most important thing is whether the activity is performed with consistency or regularity and with the intent to earn profits. The occasional or passive rental income typically do not fall within this standard. For example, someone who rents out an individual property every year and is not involved in the rental process might not be eligible, but those who manage several properties is likely to.
Management intensity plays a crucial role in classification. In the event that you and your representative are regularly involved in advertising, handling leases, overseeing maintenance, and dealing directly with tenants, your rent-related activity may rise to the level of a business. Activities such as taking rent, making fixes, scheduling maintenance, as well as managing the tenant relationship, add to the evidence that you are conducting your business in a professional manner.
The IRS has issued guidance, including a safe harbor for renting activities that qualify as a rental. In accordance with this guidance it is a good idea to perform 250 or more hours of rental service annually (including the work of employees as well as contractors) and keep proper records, the activity may be classified as to be a business or trade. Even if you do not fall within the safe harbor, your operation could still qualify if you meet the standard requirements of regularity and the intention to earn a profit.
Another factor to consider is the nature and size of properties. The management of multiple units with a clearly defined operational plan is a sign of more activity. Contrast this with a scenario in which a single holiday property is rented out seasonally via a hands-off platform. In this scenario there is a possibility that the involvement might not be sufficient for it to be considered to be a business.
The key to determining if your rental business is a business or trade is contingent on the level of involvement you have and how regularly you complete property management tasks. Proper documentation, an active involvement in the operation and a clear plan to generate revenue are important indicators. A consultation with a certified professional will further clarify your situation based on the specific circumstances of your case.
This classification can carry significant implications, particularly for tax purposes, such as is a rental property qualified business income. For more information please visit qualified business income deduction rental property.