Is a Rental Property Considered a Qualified Trade or Business

The IRS recently issued additional guidance on Section 199A, which can help some business owners significantly reduce their annual tax bill with a 20% deduction from their “eligible” business income. In order for your rental real estate company to be eligible for the deduction, you must first determine whether the business reaches the level of a business or business under section 162. But how do you make that decision? The regulations clearly state that a lessor may choose § 179 for rental property, provided that the owner meets the active business or business29 and other requirements. Known as the Tax Cuts and Jobs Act,30 the Act also expanded the section 179 definition of property by removing the exclusion for property under section 50(b)(2) – property used primarily to provide housing or in connection with a dwelling. The Committee`s report states: “Property primarily used to furnish a dwelling or in connection with the furnishing of a dwelling generally includes, for example, beds and other furniture, refrigerators, stoves and other appliances used in the living quarters of an accommodation establishment such as an apartment building, dormitory or other facility (or part of an establishment), in which sleeping facilities are provided and rented. 31 Such tangible property may be leased in the context of multi-family homes. Therefore, it is clear that owners of rental property can claim the deduction § 179 for rental property. Is a rental real estate activity considered a business for tax purposes or simply an investment? This issue was highlighted with the final eligible business income (T.D. 9847) adopted this year. The 20% QBI deduction under section 199A introduced by the act known as the Tax Cuts and Jobs Act, P.L. 115-97, is only available for activities that are considered commercial or commercial.

As a result, owners of rental activities that are not considered a business or business may lose a significant tax deduction. This column examines the treatment of rental real estate activities in accordance with QBI`s final regulations and additional guidelines published this year, and suggests related planning opportunities. In the 2019-7 tax proceeding, the IRS offered a safe haven that plans to let the activity rise to the level of a business or business under Section 162 if: The maze of rental properties discussed here does not address the many nuances associated with international taxation. And it certainly does not explore every passage through rental property taxation on the national side. If you believe that your real estate business can be considered a business or business under section 162, careful record keeping will serve you well now. We can help. Call us if you have any questions or would like to discuss this topic further. While it is best to classify a rental activity as a business or business that generates QBI, many rental activities generate tax losses due to depreciation and can therefore lead to a negative QBI, which is likely to be detrimental for tax purposes. QBI negative balance QBI positive from other sources and can be carried forward to subsequent years. Therefore, when classifying a leasing activity that causes losses as a business or business for QBI purposes, one should carefully consider.

The QBI Regulation refers to a business or company with reference to § 162. Income is income from self-employment only if the activity reaches the level of a trade or enterprise. The term “trade or industry” is used to determine net income from self-employment.23 It seems clear that if the taxpayer`s income is income from self-employment, it is also commercial or business income that is QBI, unless expressly excluded (e.B are guaranteed payments for the use of capital, that a partner in a partnership receives business or business income that is not QBI24). However, not allQIs are self-employed income. Income from rental property may come from a business or business that is not subject to self-employment tax because of the rental real estate exemption.25 A landlord who carries on a regular and continuous activity in respect of the property carries on the business or business of leasing real estate; however, the income is not subject to self-employment tax. As an example of this relationship rule, Company A only leases offices to Company B, a law firm. Partnerships A and B have the same ownership. Company A`s net rental income is considered QBI. However, rental income is specified service income since Partnership B is an SSTB and the two partnerships are jointly owned.

QBI`s final settlement provides for three ways in which a rental real estate activity may be considered a business or business authorized to generate QBI: (1) The rental activity is considered a business or business under Section 162; (2) he leases to certain related parties; or (3) it meets the requirements of a proposed safe harbor. The preamble to the final rules also states that an activity treated as a transaction under section 199A must also be treated consistently under other sections of the Code. For example, a lease as part of a joint lease of real property as an exchange or transaction under section 199A should also be treated as a separate entity from its owners under the Regulations. Section 301.7701-1(a)(2). The preamble also indicates a factor determining the appropriateness of the treatment of a rental activity as a business or business within the meaning of Sec. 199A is whether the taxpayer complies with the requirements of Section 6041 (i.e. the required declaration forms such as Form 1099-MISC, Miscellaneous Income). These factors support a case-by-case analysis. Rental activities without active management are unlikely to be eligible. The application of the QBI deduction to rental activities is often left to the discretion of the practitioner.

The lack of a clear definition of a business or business under section 162 requires practitioners to carefully analyze rental activities on a case-by-case basis. Practitioners should consider the application of the special rule, which considers the leasing of a related party as a business or business, and the proposed safe harbor. Hopefully, the Treasury will issue more definitive guidelines to encourage consistent application of the rules on QBI`s rental activities among taxpayers. The real estate rental activity of a real estate professional that is not passive in itself is not passive if the taxpayer proves a significant participation or participation in the real estate rental activity. If the income is considered non-passive under the passive activity rules, it is also not a net capital gain.14 The declaration of commercial or commercial rental property on Form 8825, which is to be transferred to line 2 of Schedule K, “Items of Distributive Shares of Partners,” of Form 1065, is supported by the instructions on line 9 of Form 8825. This instruction deals with the possible application of the new limit on business interest charges under Article 163(j). This restriction applies only to commercial or commercial activities. A business or enterprise for the purposes of Article 163(j) is defined in Article 162, the same standard as for Article 199A. Therefore, it is clear that the IRS plans to report on Form 8825 rental activities that achieve commercial or commercial status. Sharon Kreider, CPA, has helped more than 15,000 California tax advisors prepare for tax season each year.

She is also a regular contributor to AICPA, the California Society of Enrolled Agents, CCH Audio and Western CPE. You`ll benefit from the detailed and practical tax knowledge Sharon will share with you – knowledge she gained through her extremely busy, high-income practice in Silicon Valley. With her dynamic presentation style, Sharon will demystify complex personal and corporate tax laws. She is a national speaker in economic and professional groups and consistently receives excellent ratings. In 2014, she received the prestigious 2014 Sidney Kess Award from the AICPA for Excellence in Continuing Education. The provision of essential services is not treated in more detail in the case of a corporate restructuring or S-Corporation`s passive income tax. Essential services can be provided in relation to the property (e.g. B maintaining and managing the relationship with tenants) or perhaps in relation to the tenant of the property (security services, concierge services and utilities). .