How to Determine if Your Rental Property Qualifies for the Business Income Deduction
How to Determine if Your Rental Property Qualifies for the Business Income Deduction
Blog Article
Rental property investing is a popular strategy for building wealth, and one of the most powerful tools qualified business income deduction for rental property. However, not all rental ventures are automatically eligible. To claim the deduction, landlords must prove that their property qualifies as a trade or business under IRS guidelines.
This step-by-step guide will assist you in finding out if the rental property you own qualifies for this valuable tax break.
Step 1: Understand the QBI Deduction Basics
The QBI deduction permits a 20% deduction on net business income for eligible business activities. Though initially targeted towards sole proprietors as well as small business owners, real estate rental can also qualify--if it's operated as a business.
Step 2: Evaluate Your Rental Activity
Consider the following questions:
Do you manage or supervise the property?
Are you accountable for the maintenance of your property, lease, and the relationship with tenants?
Do you keep organized financial records?
Is the property intended to generate long-term income?
If the answer is yes to a majority of these questions, then your rental activities could be treated as an enterprise.
Step 3: Consider the Safe Harbor Rule
To simplify qualification to make it easier for applicants, the IRS provides the safety harbor requirement. To qualify in this way:
Your rental company must involve 250 hours or more of rental services per year.
You must keep detailed records of the time you worked, dates, and types of work done.
Records and books must be maintained for each rental event.
This rule makes it easier for landlords to prove their business operations.
Step 4: Track Rental Services
The IRS defines rental services broadly. The activities that are eligible include:
Tenant communications and screening
• Lease renewals and lease preparation
Repair and maintenance scheduling
• Bookkeeping, expense and time tracking
Supervising contractors or property managers
If you manage it yourself or delegate tasks the services you provide count towards the 250-hour minimum.
Step 5: Group Properties Wisely
If you own multiple rental properties, you can elect to group similar properties together into one enterprise. This simplifies tracking and helps achieve the hourly limit more easily. The grouping should be consistent every year, so consult a professional before doing so.
Step 6: Work With a Tax Advisor
After reviewing your actions and documents, consult an expert tax advisor to confirm your eligibility. Making sure you have the proper documents and records will guarantee the deduction is applied correctly.
Conclusion
The QBI deduction is among the most powerful tools available to property owners who own rental properties, but only if your property is categorized as an enterprise. By actively managing your rentals, documenting services, and adhering to safe harbor rules to gain this advantage. If you follow the correct approach your investment in rental properties can be even more profitable when it comes to tax time.