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August 29, 2019
Recently introduced with the Tax Cuts and Jobs Act, the Sec. 199A 20% QBI deduction is available for qualified trade or business activities. Rental real estate activity may or may not qualify for this deduction based on whether or not it is considered a trade or business or only an investment.
In order for rental real estate to be considered a trade or business it must qualify under Sec. 162, rent to specific related parties, or satisfy safe harbor requirements.
In order to qualify under Sec. 162, the type and number of properties, the owner’s daily involvement, the kinds of services provided by lease and various other terms of the lease are all considered. Renting to a related party involves renting or licensing property to a person or entity who is commonly involved meaning he or she owns 50% or more of rental activity. To satisfy safe harbor requirements, there are a several specific measurements that must be met. To name a few, separate records must be kept for the real estate activity, a penalties of perjury statement must be attached to the tax return and particular leases must not exist in which the tenement pays for insurance, maintenance and among other specific items.
Taxpayers should be cautious when classifying rental activity and using the QBI deduction. There are occasions when depreciation causes rental activities to generate a loss in which case would result in negative QBI. Negative QBI offsets positive QBI and could carry over to later years creating unfavorable tax effects. Another point to consider is the preferential election of an S corporation status for related C corporations because renting to a related C corporation will not satisfy the related-party rule.
To take a more in depth look at the QBI deduction for rental real estate activity and the related rules and opportunities, please visit the link below: