Rental Real Estate QBI Safe Harbor

Qualiﬁed Business Income (QBI)

Deduction

For tax years 2018 through 2025, you may deduct up to

20% of qualiﬁed business income 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 in-

vestment purposes and reported on Schedule E (Form

1040) is not eligible for the QBI deduction. However, you

may be eligible for the QBI deduction if you are operat-

ing 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 QBI deduction. The IRS has provided a safe harbor

under which a rental real estate enterprise will be treat-

ed as a trade or business solely for purposes of the QBI

deduction.

Note: The rental or licensing of tangible or intangible

property to a related trade or business qualiﬁes if both

businesses are commonly controlled.

Rental Real Estate Enterprise

Solely for purposes of the safe harbor, a rental real es-

tate enterprise is deﬁned as an interest in real prop-

erty 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 proper-

ties 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 dis-

regarded as separate from its owner, such as a limited

liability company (LLC).

You must either treat each property held for the produc-

tion 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.

Safe Harbor

Solely for purposes of the QBI deduction, your rental

real estate enterprise will be treated as a trade or busi-

ness under the safe harbor, if all of the following re-

quirements are satisﬁed during the tax year.

• Separate books and records are maintained to re-

ﬂect income and expenses for each rental real estate

enterprise,

• 250 or more hours of rental services are performed

per year for the rental enterprise (for rental real es-

tate enterprises in existence for at least four years, this

requirement is met if 250 hours or more of rental ser-

vices are performed in any three of the previous ﬁve

consecutive years ending with the current tax year),

• A statement must be attached to the tax return for

each year you wish to use the safe harbor, and

• You maintain contemporaneous records, including

time reports, logs, or similar documents, regarding:

– Hours of all services performed,

– Description of all services performed,

– Dates on which such services were performed, and

– Who performed the services.

Rental Real Estate

QBI Safe Harbor

2020

TAX YEAR

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This brochure contains general information for taxpayers and

should not be relied upon as the only source of authority.

Taxpayers shouldseek professional tax advice for moreinformation.

There are many events that occur during the year that can affect

your tax situation. Preparation of your tax return involves sum-

marizing transactions and events that occurred during the prior

year. In most situations, treatment is ﬁrmly established at the

time the transaction occurs. However, negative tax effects can

be avoided by proper planning. Please contact us in advance

if you have questions about the tax effects of a transaction or

event, including the following:

• Pension or IRA distributions.

• Signiﬁcant change in income or

deductions.

• Job change.

• Marriage.

• Attainment of age 59½ or 72.

• Sale or purchase of a business.

• Sale or purchase of a residence

or other real estate.

• Retirement.

• Notice from IRS or other

revenue department.

• Divorce or separation.

• Self-employment.

• Charitable contributions

of property in excess of

$5,000.

Rental Real Estate

QBI Safe Harbor

Rental services. For purposes of the safe harbor, rental

services include the following activities.

• Advertising to rent or lease the real estate,

• Negotiating and executing leases,

• Verifying information contained in prospective tenant

applications,

• Collection of rent,

• Daily operation, maintenance, and repair of the

property,

• Management of the real estate,

• Purchase of materials, and

•

Supervision of employees and independent contractors.

Rental services may be performed by owners or by em-

ployees, agents, and/or independent contractors of the

owners.

The term rental services does not include ﬁnancial or in-

vestment management activities, such as arranging ﬁ-

nancing, procuring property, studying and reviewing ﬁ-

nancial statements or reports on operations, planning,

managing, or constructing long-term capital improve

ments, or hours spent traveling to and from the real estate.

Example: Jill owns a condo that she rents out during 2020

and she does not use a management company. She receives

rent deposits directly from the tenant during the year. In May,

she made arrangements for repairs to be completed at the con-

do. She had no other contact with the tenant and did not visit

the property during the year. In this scenario, Jill’s rental real

estate enterprise probably does not rise to the level of a trade

or business under the safe harbor because it is unlikely she

spent 250 hours performing rental services. She would not be

entitled to claim the QBI deduction for her rental income un-

der the safe harbor.

Excluded rental real estate arrangements. The safe

harbor does not apply to the following rental real estate

arrangements.

• Real estate used by you as a personal residence for

any part of the year, including vacation homes.

• Real estate rented or leased under a triple net lease

which requires the tenant to pay property taxes, in-

surance, and maintenance in addition to rent.

• Real estate rented to your trade or business conduct-

ed by the taxpayer (including a partnership or S cor-

poration) which is commonly controlled.

• Any rental real estate enterprise treated as a speciﬁed

service trade or business (SSTB).

SSTB. An SSTB includes the ﬁelds of health, law, ac-

counting, actuarial science, performing arts, consulting,

athletics, ﬁnancial or brokerage services, or receiving

income for endorsing products or services, using your

image, likeness, name, signature, voice, trademark, or

public appearances.

Trade or Business

If your rental real estate enterprise fails to satisfy the

safe harbor requirements, it may still be treated as a

trade or business for purposes of QBI deduction if the

enterprise otherwise meets the deﬁnition of a trade or

business. However, this has never been deﬁned by the

IRS and has been left up to the courts, which have pro-

duced differing opinions depending on the facts and

circumstances of the situation.

Generally, a trade or business activity does not include

a rental activity or the rental of property that is inciden-

tal to an activity of holding the property for investment.