Is Your Rental Property QBI-Eligible? A Landlord’s Tax Checklist

Is Your Rental Property QBI-Eligible? A Landlord’s Tax Checklist

Blog Article

Rental property investing is a popular strategy for building wealth, and one of the most effective tools is a rental property qualified business income. But not all rental activities can be considered a business. To be eligible for the deduction, landlords must prove that their property qualifies as an industry or trade according to IRS guidelines.

Here's a step-by-step guide to finding out if your rental property qualifies for this valuable tax break.



Step 1: Understand the QBI Deduction Basics

The QBI deduction allows for a 20% deduction on net business income for eligible business activities. Although initially targeted at sole proprietors and small business owners, real estate rental may also be eligible, provided it is operated like a business.



Step 2: Evaluate Your Rental Activity

Do you have the following questions in mind?

Do you frequently manage or oversee the property?

Are you responsible for maintaining, leasing and the relationship with tenants?

Do you keep organized financial record?

Is the property intended to provide long-term income?

If the answer is yes to most of these questions, your rental business could be categorized as a business.



Step 3: Consider the Safe Harbor Rule

To simplify qualification To make qualification easier, the IRS provides the safety harbor requirement. To be eligible in this way:

Your rental business must involve 250 hours or more of rental services annually.

You must keep detailed logs of time spent as well as dates and the type of work performed.

Separate books and records are required for each rental activity.

This makes it simpler for landlords to prove their business activity.



Step 4: Track Rental Services

The IRS define rental services broadly. The activities that are eligible include:

Tenant communications and screening

Lease preparation and renewals

Repair and maintenance scheduling

Bookkeeping and expense tracking

Supervising contractors or property managers

If you manage it yourself or delegate the task they count towards the 250-hour requirement.



Step 5: Group Properties Wisely

If you own multiple rental units, you could elect to group similar properties under one company. This will make it easier to track them and help reach the hourly threshold much more quickly. Grouping must be consistent each year, so consult an expert prior to making this decision.



Step 6: Work With a Tax Advisor

After you've reviewed your activity and documentation, speak with an experienced tax professional to confirm eligibility. Making sure that you file the correct records and documentation will ensure the deduction is applied correctly.



Conclusion

The QBI deduction is among the most powerful tools for property owners with rental properties. However, only if the property is classified as an entity. If you are proactive in managing your rental properties while documenting the services you provide and following the safe harbor guidelines, you can unlock this important advantage. With the right approach, your rental investments will be more lucrative during tax season.