Is My Rental Property Qualified Business Income? How to Check Eligibility
Is My Rental Property Qualified Business Income? How to Check Eligibility
Blog Article
As a rental property owner among the crucial tax issues to address is a rental property qualified business income. If it is then you may qualify for a significant tax deduction that can boost your profitability. However, qualifying isn't automatic--it requires meeting specific IRS criteria.
Let's break down what the IRS is looking for when determining if rental activity counts as a business for the purposes of QBI.
Understanding QBI in a Rental Context
Qualified Business Income is the net earnings earned from the operation of a business or trade as a pass-through entity. While rental properties are typically considered passive income, the IRS allows certain rental activities to qualify in the event that they are in line with the standards of a business or trade.
The IRS Business Test: Are You Operating Like a Business?
To be eligible to take advantage of the QBI deduction, your rental activities should be conducted in a manner that is consistent, regularity, and a profit purpose. The IRS examines a variety of factors when determining whether your rental qualifies as an enterprise:
Active Management
You'll need to be involved in managing the property, making decisions on maintenance, interaction with the tenant along with lease enforcement.
Recordkeeping
The keeping of financial and bookkeeping records keeping track of expenses, as well as controlling income is a the seriousness of business.
Operational Structure
The existence of business-related systems, such as routine maintenance schedules, tenant onboarding, and the use of service suppliers which support the classification of business.
Use of the Safe Harbor Rule
The IRS has implemented a safe harbor policy to make qualification clearer. If your rental enterprise:
Maintains separate books and records and
Provides at least 250 hours of rental service per year, and
Keeps track of times, dates and activities.
...then it can generally be classified as a business in the eyes of QBI reasons.
This safeguard is applicable to each business separately, or collectively if similar properties are put together.
What Activities Count as Rental Services?
Rental services under the Safe Harbor rule comprise:
Advertising and tenant screening
Renewals and lease negotiation
Repairs to property and maintenance
Rent collection and bookkeeping
Coordination with service professionals
Even if you employ others to help, these hours are still counted. Just make certain that the assistance is related to the rental.
Common Situations That Qualify
Multiple properties, and managing them effectively
Short-term rentals with regular tenant turnover
Long-term rentals that are subject to ongoing improvements and management involvement
Conclusion
The question of whether or not your rental income is eligible for the QBI deduction depends on how you run your operation. By understanding the IRS standards--and especially the safe harbor rule, you can set your rental business to meet the business threshold. If done correctly, this can lead to substantial savings in taxes every year.