Qualified Business Income ( 20% QBI) deduction for Rental Properties and Real Estate Professionals

Earlier this month, the Treasury Department and the Internal Revenue Service issued final regulations regarding the new 20% deduction on qualified business income Sec 199A.

The regulation clarifies that all real estate agents and brokers who are not employees but operate as sole proprietors or owners of partnerships, S corporations or limited liability companies are eligible for the new 20% QBI deduction.

The QBI deduction is generally available to eligible taxpayers with taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the SECTION-199A QUALIFIED BUSINESS INCOME DEDUCTION article I posted previously. So, refer to that if you fall into this category.


Generally, the rule simplifies the process that owners of rental real estate enterprise must follow to claim the new deduction. As written in the Tax Cuts and Jobs Act, only income that is from a “trade or business” qualifies for the 20 percent write-off.

Proposed regulations provide a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A (20% QBI deduction) of the Internal Revenue Code.

To qualify for treatment as a trade or business under this safe harbor, the rental real estate enterprise must satisfy the requirements of the proposed revenue procedure. If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in § 1.199A-1(b)(14).

RULES OF APPLICATION to qualify for the safe harbor 
what is rental real estate enterprise?

Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.

The individual or real estate professional relying on this revenue procedure must hold the interest directly or through an entity disregarded as an entity separate from its owner. Taxpayers must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rents as a single enterprise. Commercial and residential real estate may not be part of the same enterprise. Taxpayers may not vary this treatment from year-to-year unless there has been a significant change in facts and circumstances.

The following requirements must be satisfied to qualify for the Safe Harbor:
  1. Separate books and records are kept for each rental showing Rental Income and Expenses.
    • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following:
      • hours of all services performed
      • description of all services performed
      • dates on which such services were performed
      • who performed the services.
    • Such records are to be made available for inspection at the request of the IRS.
      • The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019
  2. Rental Service Requirement
    • For tax years beginning prior to Jan 1, 2023
      • 250 or more hours of rental services are performed per year
    • For taxable years beginning after December 31, 2022
      • in any 3/5  consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years)
      • 250 or more hours of rental services are performed.
What qualifies as rental services?
  1. Advertising to rent or lease the real estate
  2. Negotiating and executing leases
  3. Verifying information contained in prospective tenant applications
  4. Collection of rent
  5. Daily operation, maintenance, and repair of the property
  6. Management of the real estate
  7. Purchase of materials; and
  8. Supervision of employees and independent contractors

The term rental services DOES NOT include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

What rentals do NOT qualify?
  1. Real estate used by the taxpayer as a residence for any part of the year.
  2. Real estate rented or leased under a triple net lease is also not eligible for this safe harbor.
Procedural requirements for application of safe harbor

A taxpayer must include a signed statement attached to the return on which it claims the section 199A 20% QBI deduction.



Section 199A Trade or Business Safe Harbor: Rental Real Estate

QBI Safe Harbor final Regulations Guidance 

The materials posted in this article are for informational purposes only and should not be regarded as accounting or tax advice provided by YR Tax Compliance LLC. These materials have been prepared by professionals, however they should not replace professional services, and the user should seek advice before acting on any information presented. Every situation is uniquely different, and could make a world of difference on implementation of specific regulations.  YR TAX Compliance LLC assumes no obligation to provide notification of changes of tax laws, regulations or other factors that could affect the information posted.