Rental Real Estate and the QBI Deduction

With year-end tax planning upon us, it important to shed light on updates of the 2017 Tax Cuts and Jobs Act.

It was the TCJA that introduced the 20% qualified business income (QBI) deduction for trades and businesses. One question that required clarification was how does your business know if its rental real estate activity qualifies as a trade or business? The foundation of this answer lies within Rev. Proc. 2019-38. Understanding where your business/trade stands within its rental real estate activity will be crucial come tax season.

According to Rev. Proc. 2019-38, safe harbor may be used by taxpayers and relevant pass-through entities. These taxpayers/entities must either own a direct interest or an interest through a disregarded entity in a “rental real estate enterprise” in order to qualify. With this in mind, there are four requirements to be met to qualify as an RPE under the safe harbor:

1. Each rental real estate enterprise must maintain separate books and records to reflect its income.
2. Rental real estate enterprises in existence:
   • < four years must perform 250+ hours of rental services per year.
   • > four years must perform 250+ hours of rental services in three of the five consecutive tax years that end with the current tax year.
3. If tax years begin on or after Jan. 1, 2020, taxpayers must keep records of time reports, logs, and more.
4. If the taxpayer relies on the safe harbor, the taxpayer or RPE MUST attach a statement to an original tax return for each tax year the safe harbor was relied on.

Triple net leases still do not qualify under the safe harbor.

Of course, not all businesses/trades will qualify for the safe harbor. In this instance, there are other methods to qualify outside of the safe harbor. As also stated in Rev. Proc. 2019-38 (as well as the article itself) taxpayers can qualify for “the business income deduction if they can meet the definition of a qualifying trade or business under Code Sec. 199A.”