Follow Adam Linkedin Twitter Facebook
Email Adam Email
Financial
Apr 1, 2019

Is Your Rental Property Eligible for 20% of Income Tax-Free?

Sponsored Content provided by Adam Shay - Managing Partner, Adam Shay CPA, PLLC

Recently, the IRS released final regulations on a provision of the Tax Cuts and Jobs Act, most commonly known as the 20 percent Qualifying Business Income (QBI) deduction. 
 
This deduction allows taxpayers to potentially receive 20 percent of their business income tax-free. While it may not be intuitive that QBI applies to rental income, it can, so long as certain criteria is met. 
 

Who is Eligible for the QBI Deduction?

Generally speaking, any taxpayer is entitled to the 20-percent deduction of QBI, so long as the business is operated as a sole proprietorship or partnership, S corporation, trust or estate. Taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, are subject to certain limitations that may reduce the deduction. Any income earned through a C corporation is not eligible for the deduction.
 

How Does the QBI Deduction Affect Rental Owners?

There was plenty of ambiguity in previous proposals regarding rental real estate income. With the publishing of the final regulations, the IRS provided some much-needed clarification that provided relief for all parties concerned.
 
Let’s examine some of the major bullet points that rental owners need to know for tax years 2019 thru 2026:
  • Safe Harbor: The IRS provided Revenue Procedure 2019-7, which offered “safe harbor” conditions under which rental real estate activity will be treated as a trade or business for the sole purpose of the 20-percent QBI deduction. Notwithstanding, additional conditions must be met for a rental real estate enterprise to be deemed an eligible trade or business for QBI purposes:
    1. Separate Books and Records – must be maintained for each rental real estate enterprise (or combined for grouped enterprises).
    2. 250 Hours Requirements – The IRS provided a bright-line rule that requires at least 250 hours of rental services to be performed by the taxpayer and/or workers for the taxpayer. Rental services are explicitly outlined as: (a) advertising to rent; (b) negotiating and executing leases; (c) verifying tenant applications; (d) rent collection; (e) daily operation and maintenance; (f) management of the real estate; (g) purchasing of materials for operation of rental services; and (h) supervision of employees and independent contractors. Rental services do not include: financial/investment activities; procuring new rental property; reviewing financial statements; planning; constructing long-term capital improvements; or hours spent traveling to and/or from rental properties.
    3. Contemporaneous Records (starting in 2019) – to include time reports, logs or other documents regarding: (a) hours of all services performed; (b) the description of all services performed; (c) dates on which such services are performed; and (d) who performed the services.


The (Double) Bottom Line for Rental Owners

The 20-percent QBI deduction isn’t for every rental owner. If you own just one or two properties, it may be difficult to satisfy the 250-hour safe harbor requirement. On the other hand, it could provide huge deductions for others.
 
Here are some additional considerations:
  • Rental owners looking to deduct 20 percent of their rental income must adhere to the requirements outlined above in order to be afforded safe harbor and be treated as a trade or business for Section 199A purposes. Keep detailed records.
  • Rental property used as a personal residence for more than 14 days out of the year disqualifies the residence for the safe harbor deduction.
  • Real estate rented under triple net leases (NNN) are not eligible for the safe harbor.
  • If you make the argument that your rental is a trade or business for the 20-percent QBI deduction, then you’ll have to perform essential functions as a normal trade or business.
  • Just because your rental real estate enterprise does not meet the safe harbor requirements does not necessarily preclude your rental from the 20-percent QBI deduction. Seek advice from your trusted tax professional for more information.
Our goal today was to educate you on the application of the 20-percent QBI deduction as it pertains to the business of rental properties. This area of the code is really new and fairly complex. Be sure to seek the advice of a tax professional as it pertains to your specific situation.

Adam Shay, CPA (NC License Number 35961), MBA, is managing partner of Adam Shay CPA, PLLC. Over the last several years, the firm has grown from a one-man shop to one of the largest firms in the Wilmington area. Adam focuses on minimizing taxes and improving the financial results of entrepreneurs. Those results are obtained by taking a proactive approach to all aspects of taxes and financials. Adam is actively involved in supporting the Wilmington entrepreneurial and startup community. He earned a Bachelor of Business Science in commerce from the University of Virginia and a Master of Business Administration (MBA) degree from the University of Maryland. During his spare time, Adam enjoys spending time with his two boys and wife, Sarah, as well as coaching and watching sports and spending time outdoors. 

Other Posts from Adam Shay

Adam shay blk 52015121549
Ico insights

INSIGHTS

SPONSORS' CONTENT
Alyce 4 april242017

Investors with A Cause Can Put their Money Where their Hearts Are

Alyce Phillips - Old North State Trust LLC
Chris coudriet

Thank You, New Hanover County Employees

Chris Coudriet - New Hanover County Government
Leath 683x10242

How to Fire Someone Effectively

Lisa Leath - Leath HR Group

Trending News

Entrepreneur Richard Johnson's Latest Project Aims To Boost Burgaw

Johanna Cano - Jun 14, 2019

Nearly Done With The Pearl, Developer Plans 32 More Downtown Apartments

Cece Nunn - Jun 14, 2019

Plastics Molding Manufacturer Gets Its Start In Wilmington

Christina Haley O'Neal - Jun 14, 2019

New Hanover Regional Grows To A $1.2B Operation

Vicky Janowski - Jun 14, 2019

Field Of Vision

Jenny Callison - Jun 14, 2019

In The Current Issue

Building Efforts To Attract Workers

With demand running high for construction industry workers, officials with area training programs and companies are looking for ways to attr...


NHRMC Recognized For Patient Experience

New Hanover Regional Medical Center was recognized for its patient experience through the Healthgrades 2019 Outstanding Patient Experience A...


Firms Navigate Latest Tax Law Changes

During tax season this year, media reports indicated that the many changes in the Tax Cuts and Jobs Act of 2018 were producing confusion amo...

Book On Business

The 2019 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`
Transporting the Future - Power Breakfast 3.12.2019
Health Care Heroes 2018