Understanding Qualified Business Income (QBI) for Rental Property

Understanding Qualified Business Income (QBI) and how it applies to rental properties is crucial for maximizing tax benefits. Here’s an overview:

1. What is QBI?

• Qualified Business Income (QBI): A deduction available under Section 199A of the Internal Revenue Code, which allows eligible taxpayers to deduct up to 20% of their QBI from their taxable income. This deduction is generally available to individuals, partnerships, S corporations, and some trusts and estates engaged in a qualified trade or business.

2. Does Rental Income Qualify for QBI?

• Rental Real Estate as a Trade or Business: Rental income can qualify for the QBI deduction if the rental activity rises to the level of a trade or business. This determination depends on facts and circumstances, such as the level of involvement, the regularity of the activity, and the intent to make a profit.
• Safe Harbor Rule: The IRS provides a safe harbor under Revenue Procedure 2019-38, where rental real estate activities qualify as a trade or business for QBI purposes if certain criteria are met, including maintaining separate books and records for each rental activity, performing at least 250 hours of rental services annually, and keeping contemporaneous records of these services.

3. Aggregation of Rental Activities

• Combining Properties: Taxpayers with multiple rental properties may elect to aggregate them as a single trade or business if they meet certain conditions. This can simplify the QBI calculation and potentially increase the deduction.

4. Limitations and Exclusions

• Wage and Qualified Property Limitations: The QBI deduction is subject to limitations based on W-2 wages paid and the unadjusted basis immediately after acquisition (UBIA) of qualified property. For some high-income taxpayers, these limitations may reduce or eliminate the deduction.
• Excluded Income: Not all rental income qualifies for the QBI deduction. For example, rental income from properties held for investment purposes without substantial involvement in the management or operation typically doesn’t qualify.

Best Practices

• Document Everything: Keep detailed records of your rental activities, including hours spent managing the property, services performed, and any separate books and records for each property.
• Consult a Professional: The rules around QBI and rental properties can be complex. A CPA can help determine whether your rental activities qualify for the QBI deduction and ensure you maximize your tax benefits.

Why Choose AJB & Associates?

At AJB & Associates, we specialize in tax strategies for rental property owners. Our expertise in QBI and other tax benefits ensures you get the most out of your rental investments while staying compliant with the latest tax laws.

Visit ajbcpas.net to learn more about how we can help you navigate QBI and optimize your rental property tax strategy.