Rental Income Tax Question

[popntx]

I've been working on estimating my 2018 taxes in order to determine how much I can convert from my traditional IRA to a Roth IRA for the 2018 tax year and stay within the 12% bracket. I had used both the OLT tax estimator and the 2018 Federal Income Tax Excel Spreadsheet (Draft) and came up with identical results.

I then tried FreeTaxUSA and it came up with a new wrinkle that I'd never heard of. After inputting all of my data, it calculated an additional "Qualified Business Income Deduction" that I could take. I submitted a question to FreeTaxUSA asking what this was all about, and they informed me that because I have rental income on a rent house that I own, I am considered an "active participant in the rental and the income/loss is at risk, so it is considered business income. Therefore, our software used the: 2018 Qualified Business Income Deduction Simplified Worksheet."

They referred me to the IRS worksheet and sure enough it calculates a 20% deduction of the net income on the property.

I passed this by my tax man and he said it was his understanding that my rental property is not a "business" and that the deduction is for S Corporations. He said he was going to school in a couple of weeks and find out.

So, I have 2 questions. I know this is really getting into the "tax weeds", but is anyone familiar with this particular deduction? And are there any other good 2018 tax estimators out there? I looked at turbo tax and couldn't figure out how to use it to estimate 2018 taxes.

Thanks!

 

[cathy63]

Kitces discussed this recently on his blog:

https://www.kitces.com/blog/real-estate-aggregation-section-199a-qbi-deduction-rules/

The caveat, however, is that recent Treasury Regulations have clarified that not all direct real estate investing will actually qualify for the Section 199A deduction. Instead, investors must be able to demonstrate that they are operating a real estate “business” in order to qualify and show that either they personally, or other employees of the business, are spending a substantial amount of time actually engaged with the real estate (to differentiate a business from a mere real estate “investment” instead).

 

[pb4uski]

It depends. See https://www.kitces.com/blog/real-estate-aggregation-section-199a-qbi-deduction-rules/

 

[kaneohe]

https://www.nolo.com/legal-encyclopedia/how-the-republican-tax-plan-affects-landlords.html

sounds real tho there are some restrictions......

 

[popntx]

Thanks for the responses. Based on the links there appears to be a lot of ambiguity about the code and differing opinions about the deductibility of rental income. I'll wait and see what my tax man tells me.

 

[target2019]

20% deduction for Qualified Business Income (QBI / passthrough income) from partnership, S corporation, limited liability company or sole proprietorship - not just S corporation.

 

[jebmke]

20% deduction for Qualified Business Income (QBI / passthrough income) from partnership, S corporation, limited liability company or sole proprietorship - not just S corporation.

Also, REITS if held individually but not REIT mutual funds/ETFs if I understand correctly.

 

[Sunset]

OP - glad you brought this up.

At first glance, being a hands on (collect the rents, do the repairs myself) kind of landlord, I think I qualify and will claim it.
Worst case is IRS disagrees and we can argue and win again

 

[Octogirl]

+1. Need this info soon for 2018 taxes.
20% deduction for Qualified Business Income (QBI / pass through income) from our real estate business/ sole proprietorship.
Thanks ....

 

[Luck_Club]

They referred me to the IRS worksheet and sure enough it calculates a 20% deduction of the net income on the property.

I passed this by my tax man and he said it was his understanding that my rental property is not a "business" and that the deduction is for S Corporations. He said he was going to school in a couple of weeks and find out.

So, I have 2 questions. I know this is really getting into the "tax weeds", but is anyone familiar with this particular deduction? And are there any other good 2018 tax estimators out there? I looked at turbo tax and couldn't figure out how to use it to estimate 2018 taxes.

Thanks!

Maybe time for a new accountant?

 

[Offgrid Organic Farmer]

I have owned apartments in California, Scotland, Connecticut, and Washington. In each of these cases, we were able to use the write-offs against my salary income.

I owned them, no corporations. I advertised vacancies, I interviewed prospective tenants, and I managed the properties. When I was out-to-sea my wife did all these roles for me.

In 2016, we formed an LLC and bought another apartment building. We still do everything ourselves, but for now, our personal income is only our pensions. So we are no longer concerned with write-offs against our taxable income.