Am I a "qualified trade or business" for the new 20% QBI deduction?

[Cobra9777]

We own one single-family rental home. We have no mortgage and it routinely generates positive cash flow. We have a long-term tenant who takes care of routine maintenance like changing HVAC filters, mowing, minor painting, minor repairs, etc. I personally handle all other maintenance and repairs, most of which I do myself. That includes minor plumbing repairs, fixing fences, repairing doors/locks, outside painting when needed, dead tree removal, baiting rat traps, etc. I also arrange for all maintenance jobs I can't do myself, typically HVAC and some plumbing.

But for the most part, this property is on auto-pilot. I would estimate that I spend about 2-3 hours per month (on average) dealing with various issues. And it's not unusual to go 3-4 months with no issue at all. But then I might have a month with several issues requiring many days to resolve.

From my research about this new provision of the tax code, we seem to be on somewhat precarious grounds as to whether this is a qualified trade/business or just an investment in real estate that generates some income.

Just curious about others here who are somewhat "casual" landlords. Are you planning to claim the 20% QBI deduction for 2018? Given my specific situation, would you claim the deduction?

 

[socca]

I'm in the same boat, except I manage farmland instead of rental real estate. My approach to this question:
(1) Read the new Section 199A. Try to make sense of it. Might fail.
(2) Google "QBI deduction farmland management" and see what 'experts' have to say about this case (in your case, use 'real estate management' instead)
(3) Talk to an enrolled agent or CPA who specializes in tax preparation

My goal: have a defensible position in case my tax return is audited.

Good luck!

 

[cathy63]

We are in a similar situation, so I looked at the TurboTax help as I was doing a test return and found that it's not very helpful. Apparently you just have to decide whether or not to take the risk. We decided not to for this year, since we have a capital loss carryover from prior years. Here's the relevant portion of the help file:

There is considerable uncertainty about whether a small-scale, long-term rental of a single property or small number of properties is a "trade or business." This applies to the relatively common situation where a taxpayer owns a single rental home or two, and has relatively stable tenants that generally stay for a year at a time or more. Numerous court cases exist where situations meeting this description have been considered a "trade or business," and others where similar situations have not been considered a "trade or business."

On one hand, it can be an advantage to be treated as a "trade or business" if the activity has a tax gain, because this gain may increase the amount of your QBI deduction. On the other hand, if an activity has a loss for tax purposes, you might not want it to be a "trade or business" because the loss from this activity may reduce your QBI deduction.

 

[Sunset]

I have not looked at it yet, however in general my approach is if I think I fit the deduction, then take it.
Should the IRS disagree with me, we can talk about it. It has happened in the past and they agreed with me one time and they won the other time.

If I don't take deductions I'm entitled to, the IRS will NOT phone me up to say I should take this deduction.
If they would do this, then I wouldn't claim any deductions, and just let them correct my returns.

 

[GNXGuy]

your rental income should be reported on Schedule E, therefore you qualify by default

Farm income or lack there of is reported on Schedule F, therefore you qualify by default

 

[davebarnes]

This is why I spend $300 every year for a guy to prepare my taxes’ paperwork.
Have been using the same firm since 1981.

 

[kaneohe]

your rental income should be reported on Schedule E, therefore you qualify by default

............................................

What is the reasoning here?

 

[Philliefan33]

Schedule C income should be fairly simple to qualify for QBI ( except for those activities carved out).

But I go back and forth with QBI for Schedule E income. Lately I’ve landed on “not QBI”. My resining? If it were business income, we should have been paying self-employment taxes on it all along.

 

[Cobra9777]

Thanks all.

We are in a similar situation, so I looked at the TurboTax help as I was doing a test return and found that it's not very helpful. Apparently you just have to decide whether or not to take the risk. We decided not to for this year, since we have a capital loss carryover from prior years. Here's the relevant portion of the help file:

I read the same guidance in TurboTax yesterday, which I agree is not very helpful. However, that guidance also includes this...

...here are some guidelines for what types of rental or royalty activities are considered a trade or business. If you are renting property that requires very infrequent interaction with the tenants and maintenance to the property, the courts have generally found this type of activity is not a "trade or business". On the other hand, if you rent out property that requires frequent tenant interactions or maintenance services, this type of activity is generally classified as a "trade or business."...

I do have regular interactions with the tenants and perform maintenance services on a regular basis. Although I concede that it falls well short of what most would consider a "job" or "running a business"... typically just a few hours per month on average. But that's really just the natural result of the small scale of the operation. If I had 5 similar houses and spent 20-25 hours per month, I think most would agree that qualifies. But what's the real substantive difference in those cases? Scale? Seems quite arbitrary.

I manage income to the top of the 12% bracket via Roth conversions. So my upside by taking this deduction is the extra Roth conversion, on which I expect to save 10% (12% now vs 22% at RMD time). If I get audited and fail, the downside is 27%, since it will push an equivalent amount of income into the dreaded 27% incremental bracket (12% tax on ordinary income plus 15% on QDs and LTCGs). While it's not a significant amount of money either way, the downside potential is making me a bit squeamish.

 

[USGrant1962]

Kitces did a good write-up, and you are correct that it is somewhat subjective.

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

But most analyses I've seen suggest that owning a single property would be considered an investment and not a business, so not qualified for QBI.

 

[calmloki]

Always been amused that our rental income is considered "unearned income". Five addresses, 37 units; it sure feels like we earn every dime. I expect our tax person to have us qualified for the QBI deduction.

 

[socca]

Farm income or lack there of is reported on Schedule F, therefore you qualify by default

In my case, I run a sole proprietorship that does farm management consulting; the income is reported on Schedule C and I receive 1099-MISCs from my clients. I haven't poked my nose into this topic yet, but it seems that the bureaucrats are hostile to 'professional service' businesses for some reason so I might be out of luck.

 

[USGrant1962]

In my case, I run a sole proprietorship that does farm management consulting; the income is reported on Schedule C and I receive 1099-MISCs from my clients. I haven't poked my nose into this topic yet, but it seems that the bureaucrats are hostile to 'professional service' businesses for some reason so I might be out of luck.

As a Schedule C sole proprietor you should be eligible unless you have a high income. QBI phases out above $157K/$315K single/joint filer.

I am not a tax advisor...

 

[Cobra9777]

Kitces did a good write-up, and you are correct that it is somewhat subjective.

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

But most analyses I've seen suggest that owning a single property would be considered and investment and not a business, so not qualified for QBI.

Thanks. I also read that piece yesterday. And several others. Somewhat more helpful than TurboTax but, as you said, still quite subjective. It appears there is no clear criteria for this question.

Right now, I'm leaning toward taking the deduction and documenting all my 2018 trips to the property, repairs, tenant interactions, interactions with service providers, etc. Then hope for the best. I have until this afternoon to decide because that's when I have to do my 2018 Roth conversion.

 

[wolf]

Same situation. My understanding. We qualify for the 20%. Read many articles addressing this question. All "experts", said yes.

 

[GNXGuy]

Except for specific items listed not allowed

What is the reasoning here?

 

[gauss]

This issue precedes the new QBI deduction. The issue involved is when does rental income rise to the level of a trade/business vs being just investment income.

I went through this with much detail a few years ago when I turned my late father's old condo into a rental property. The issue for me was important because for businesses, startup costs can be deducted (5,000 the first year, and amortizing the remainder over a 15 year period), but for investments these costs would not be deductible in any fashion.

I had 2 years of startup costs (condo fees / electricity / natural gas) so I was motivated to investigate this.

The fact that I was not using an outside management firm to manage the rental property, but rather doing it myself -- and doing all the repairs myself as well as finding my own tenant, led me to believe that I could qualify for a business.

Nolo had a pretty good discussion of this in their "Every Landlord's Tax Deduction Guide" book. They even cited various court decisions that went both ways and described the circumstances.

I plan to claim the QBI when I file my 2018 tax return.

Worse case, if I am audited and questioned on this, I will give my reasoning. If they don't accept it, I will have them escalate it to a supervisor and repeat.

At the end of the day, the worse case scenario is that I will have to pay back the original deductions with a bit of interest.

-gauss

 

[USGrant1962]

On a related note, H&R Block just updated their 2018 software and I ran it to see my QBI. I got a big fat zero

It seems there is another restriction tied to capital gains income unrelated to the business. One site describes it this way:

If your taxable income (reduced by any income taxed at capital gain rates and before applying any QBI deduction) is less than your qualified business income, the QBI deduction is limited to 20 percent your taxable income (reduced by any income taxed at capital gain rates).

So because I sold a bunch of stock this year, I lose the QBI deduction on earned business income...grrrr!

I get where they are coming from, trying to make sure capital gains are not double-tax-advantaged. But the math does not seem right - doing what the paragraph above describes still leaves me some room for the QBI deduction.

Of course the software says "this interview isn't final" so we'll see.

 

[Cobra9777]

This doesn't look good for me. 250 hours would be a big stretch.

IRS Publishes Final Guidance On The 20% Pass-Through Deduction

In Revenue Procedure 2019-7, the IRS offered a safe harbor providing that a rental activity ... will rise to the level of a Section 162 trade or business if:

• separate books and records are maintained for each rental activity (or the combined enterprise if grouped together),
• 250 hours or more of "rental services" are performed per year for the activity (or combined enterprise), and
• the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding 1) hours of all services performed, 2) description of all services performed, 3) dates on which such services are performed, and 4) who performed the services.

 

[jkern]

I have three rental properties and after reading as much as I can about the deduction, I have come to the conclusion that I do not qualify for QBI.

 

[kite_rider]

I have three rental properties and after reading as much as I can about the deduction, I have come to the conclusion that I do not qualify for QBI.

How did you get to that conclusion? We own/manage 4 properties (6 individual rental units) and I'm thinking that I would qualify based on the recent guidelines. The 250 hours is somewhat subjective since I could claim the countless hours on You-Tube researching each maintenance task.

I also read somewhere that returns from a REIT investment would qualify for this deduction as well (if you met the qualifications otherwise). That sounds too good to be true. Any one else notice this?

 

[CardsFan]

I also read somewhere that returns from a REIT investment would qualify for this deduction as well (if you met the qualifications otherwise). That sounds too good to be true. Any one else notice this?

This appears to be the case. I just ran my numbers through Turbotax. Apparently one of my mutual funds has a small position in REIT's. A whopping $11 dividend, resulting in a $2 credit.

 

[pb4uski]

I have a similar quandry for my Mom's commercial rental building. It is a long-term, single tenant commercial building under a long-term lease. Tenant has been in place for 30 years. We are responsible for repairs and maintenance of the outside and they are responsible for the inside leasehold improvements. We pay property taxes, insurance and water. the tenant pays for its own electricity. We have occasional issues and then more intense time when the lease expiry rolls around, but probably not close to 250 hours a year.

I'm on the fence but leaning towards taking QBI and accepting any audit risk. We won't meet the 250 hour safe harbor requirement but IMO that is arbitrary and we are happy to debate the issue with them in tax court is need be. While we don't work 250 hours a year on the rental, we are effectively "on-call" 24/7/365 if there are any tenant problems and in the IRS calculus that doesn't count for anything.