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:
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.”