Taxpayers involved in Real Estate are the largest group of tax clients for my Richardson, TX tax firm. Did you know that Landlords who spend at least 250 hours a year managing and maintaining their rental properties may be eligible for the Qualified Business Income (QBI) deduction (QBID). That averages out to just under five hours a week.
What is the QBI Deduction (QBID) and How Do You Qualify?
Unlike other deductions, the qualified business income deduction does not require that you spend money. Instead, it’s a straight deduction, for up to 20% of net rental income for the year. For clients who qualify, this deduction allows rental property owners to pay tax on as little as 80% of their net income from qualifying rental properties. We even have the option of grouping several rental properties together to meet the 250-hour requirement.
Qualifying for this deduction can be tough. Here are the three factors we’re looking for:
- 250 hours per year spent managing and maintaining your rental properties.
- You did not live in the rental property for any part of the year.
- The property isn’t rented under a triple-net lease.
To reach the 250-hour threshold for the QBI deduction, we add up the hours you spend managing the rental property, and also time spent by your property manager, landscapers, repair contractors, and any other people you hire to maintain or manage the rental properties. Rental services that count toward the 250-hour test include:
- Advertising
- Negotiating leases
- Verifying rental applications from prospective tenants
- Collecting rents
- Maintenance and repairs
- Purchasing materials
- Supervising contractors and employees
Records Are Critical
Keep meticulous records of all the time spent managing your rental properties. Reviewing your time logs is how we—and the IRS—will be able to figure out if you qualify for the QBI deduction for the year.
You’ll need to keep track not only of the time you spent yourself, but also time spent by any other people you hire to work on your rental properties. Your time log will need to track four data points:
- The dates rental property services were performed
- Number of hours spent
- Who performed the work
- A description of all the work done on that day
Finally, the IRS requires that you maintain separate books and records for each rental property. We can help you set up your bookkeeping, records and time logs so that you can claim this valuable deduction.
Do You Need Help?
If you have Rental Real Estate tax planning questions, or have any other tax or IRS issues, we’d like to help. Please give me a call at (972) 821-1991 or email me at [email protected].
