In December of 2017, the Tax Cuts and Jobs Act (TCJA) introduced a new “Qualified Business Income Deduction” (QBID) under IRS Section 199A. The QBID provided a deduction of up to 20% of qualifying income on the tax return and enable major tax savings to small business clients that qualified. . This deduction was applicable to business income including qualifying Schedule C, Partnership, and S-Corp Income.
Does income on Rental Real Estate qualify for the QBI Deduction?
The answer is like many questions related to tax law is that it depends. Not all rental real estate income will qualify. It will qualify for QBID is if it meets any of the following three tests:
1. The rental real estate rises to the level of a section 162 trade or business. Triple Net Leases are specifically excluded.
2. The rental real estate is a rental real estate enterprise meeting the requirements of the safe harbor provided in Rev Proc 2019-38.
3. The rental of property is to a commonly controlled trade or business operating by an individual or business operated by an individual or passthrough entity as described in section 1.199A-1(b)(14) a.k.a. – self rental.
Whether a business, particularly a real estate investment by an individual, rises to the level of business under Section 162 can be a gray area based on the facts of the investor and investments. In addition, for investors that do qualify and are above the income thresholds ($315,00 for MFJ taxpayers and $157,500 for other filers) the calculation may have more complexity that can limit or eliminate the deduction.
Still, if you are a real estate investor with several properties and who may qualify for the QBI Deduction, it is worthwhile to learn more to determine if you qualify for the deduction.
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