posted byBagasian LawAugust 27, 2021
Most rental owners have heard of the new qualified business income deduction for rental property, and many people wonder: "Am I eligible for the QBI deduction?"
Whenever the new federal tax law changes the rules for small businesses, these taxpayers must determine whether the change applies to the rental property owner.
By complying with the record-keeping rules detailed in the recent IRS guidelines, residential and commercial rental properties owners will benefit from one of the most important deductions in the new tax law.
Let's discuss qualified business income deduction for a rental property in detail to make it clearer.
In this blog we will discuss the following things:
Qualified Business Income Deduction for rental property is a tax deduction that allows eligible self-employed individuals and small business owners to deduct up to 20% of taxes on qualified business income.
Generally speaking, the total taxable income of a single filer in 2020 should be less than US$163,300, and the total taxable income of a joint filer should be less than US$326,600.
In 2021, the single filer limit will be increased to US$164,900, and the joint filer limit will be increased to US$329,800.
Beyond this limit, complex IRS rules will determine whether business income is deductible fully or partially.
According to the US Internal Revenue Service, QBI is "the total net income, profits, deductions, and losses of a qualified trade or enterprise." It applies to trade or business income and does not include income from capital gains or wages.
In general, it includes the deductible part of:
Things get complicated knowing exactly who is qualified and what is qualified. For example, rental property income counts as QBI but is only eligible if the investor actively manages the property. QBI includes revenue from PTPs and REITs.
Taxpayers can make QBI deductions regardless of whether they use Schedule A itemized or take standard deductions. QBI deductions can be applied to any or the other of the former and are subject to limitations based on:
The qualified business income deduction for rental property is usually the smaller of the following two options:
If your company is not an SSTB but a single filer with taxable income of more than $207,500, or if you are a married person with taxable income of more than $415,000, the QBI deduction is limited to one of the following conditions:
Each property should be treated as a separate company or grouped with all types of similar properties as a single company. You cannot change the business classification of your property individually or collectively unless your circumstances change significantly.
Commercial and residential properties cannot belong to the same RREE.
For multipurpose properties that include residential and commercial aspects, individuals can choose to treat the property as a single RREE or divide the property into separate commercial and residential interests.
For the rental real estate business to benefit from a safe harbor, it must meet four requirements:
First requirement
Separate account books and records should be kept reflecting the income and expenditure of each rental property company.
Second requirement
For leasing real estate companies under four years, it is necessary to provide more than 250 hours of leasing services per year than leasing real estate companies.
For leased real estate businesses that last for four years or more, 250 hours or more of lease services must be provided within three years of the five consecutive tax years ending in the current tax year.
Third requirement
For tax years starting on or after January 1, 2020, taxpayers must keep records of the same period, including time reports, diaries or similar documents, about:
For previous fiscal years, taxpayers still need to be responsible for demonstrating compliance with hours requirements.
Fourth requirement
The taxpayer or RPE have to file the original tax return (or revised tax return applicable only in the 2018 tax year) filed in time for each tax year that the taxpayer or RPE relies on Safe Harbor. The declaration must be attached.
Taxpayers or RPEs must choose whether to use the safe harbor each year or not.
Self-rental
Self-rental is when you rent property to your own business. The final rules for QBI deductions include a provision that makes self-rentals eligible till they are commonly controlled.
It means that individuals or groups own at least 50% of rental properties and businesses that lease properties. The owner must be an individual or pass-through entity. The owner should not be a C corporation.
Triple net lease
Property taxes, insurance maintenance costs, and fees are generally the responsibility of the owner. In a triple net lease, called a triple-net or NNN, the tenant pays part or all three costs.
Therefore, it can be difficult for the triple net lease to be deductible, as most of the work related to the triple net lease is non-deductible for:
Triple-net leasing also gives tenants more responsibilities than landlords, resulting in less "continuous and regular" participation by landlords.
However, triple net leases do not necessarily exclude the eligibility for QBI deductions. Owners must meet all safe harbor standards.
20% is a huge saving and can be achieved in various ways with the qualified business income deduction for rental property. You need to work enough hours to qualify for a deduction, and you need to work to determine if you are eligible for a deduction.
Fortunately, Law Offices Of Alina Bagasian can help you in qualified income deduction for real estate.
Find out how we can help you save over 20% of your taxable income.
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