October 9, 2019 - QBI and Real Estate

Many of you heard about the new 20% “qualified business income” (QBI) deduction, which is applicable to those with S corps, partnerships and sole proprietorships. The deduction allows you to deduct 20% of your net income. But what about those with rental properties? Well – here is the catch – the rental activity must rise to the level of a “trade or business”. Normally, in order to qualify as a real estate professional and consider the income/loss “ordinary” – you must spend more than HALF of your time in real estate and at least 750 hours/year. This allows you to deduct real estate losses against other ordinary income (like W-2 wages and independent contractor income). As many of you know, real estate often results in a “paper loss” because of depreciation but this loss is oftentimes considered “passive”.

However, in the case of the QBI deduction – there is a safe harbor provision, which allows you to qualify by spending only 250 hours per year on the rental activity. This activity can include repairs and maintenance, tenant services, property management, advertising the property, collecting rents and negotiating leases. This activity does NOT include driving to/from the property, arranging financing and capital improvement projects. The safe harbor also does not apply if you use the property for the greater of 14 days or 10% of the total days rented.

But what about people with multiple rental properties? You need to meet the 250 hour requirement for EACH property unless you file a Sec. 469(c)(7)(B) election declaring that you’re a qualifying taxpayer (based on the 250 hour test) and you’re making this election. This election is binding for the year filed and all future years until it is revoked. A late election filing is possible as well.

What does this allow you to do? Now you need to meet the 250 hour/year test considering ALL your properties – not each one individually. As you can imagine, working 250 hours/year on ONE property is pretty improbable.

Note – if you’re a married couple working on real estate together – each of you must meet the 250 hour test individually.

If you have questions about making the Sec. 469(c)(7)(B) election – contact me. 🧐