Form 199A - is it new this year ?

[RetireBy90]

Just finishing up my 2025 federal taxes with TT. We have a single rental property and employ a management company.
This year there is a new form I've not seen previously, 199A at the end of the paperwork for the property. It contains a statement that lists several statements we must affirm stating
- Separate books and records are maintained
- 250 of more hours of rental services were performed with respect to this enterprise
- Contemporaneous records have been kept to document the rental services performed
- No property was used as a residence for any part of the year
- No property was rented or leased under a triple net lease
- No property was rented to a commonly controlled business

I've bolded the 2nd statement. Between the property management company and myself I think we have qualified for this statement but I'm concerned when a new requirement that I'm not familiar with is added. I sure don't want to get DW in trouble
Anyone have any experience or knowledge why this form is part of my federal taxes for 2025 ?

Thanks

 

[SecondCor521]

I was unable to find any Form 199A at IRS.gov/forms, and I don't use TT so I can't help in that regard.

What I do know is that Section 199A of the tax code is related to the QBI deduction. You're probably eligible for the QBI deduction based on having a rental property.

I also know that Section 199A of the tax code was amended in several ways by the OBBBA. I didn't go all the way down the rabbit hole, but it looks like there was a small change with respect to material participation in businesses related to the QBI deduction.

You might take a look at the relevant sections of the OBBBA act to see if that is what triggered the change in TT. I'd look at Section 70105 in particular, although that doesn't seem to apply to 2025. You could also ask TT customer support.

 

[RetireBy90]

I was unable to find any Form 199A at IRS.gov/forms, and I don't use TT so I can't help in that regard.

What I do know is that Section 199A of the tax code is related to the QBI deduction. You're probably eligible for the QBI deduction based on having a rental property.

I also know that Section 199A of the tax code was amended in several ways by the OBBBA. I didn't go all the way down the rabbit hole, but it looks like there was a small change with respect to material participation in businesses related to the QBI deduction.

You might take a look at the relevant sections of the OBBBA act to see if that is what triggered the change in TT. I'd look at Section 70105 in particular, although that doesn't seem to apply to 2025. You could also ask TT customer support.

Thanks for the reply. I looked and did claim QBI last year.i
I’ll do some more research.

 

[NeilDH]

Right, these appear to be questions about whether you're allowed to take that QBI deduction, based on whether your rental could qualify as a business. Those questions are the "safe harbor" questions. The 250-hour rule clearly is what trips most people up — do you (or your property manager) really spend 5 hours a week managing the property?

I did start going down the rabbit hole, and the results are murky. Those questions are emphasized over and over, but many seem to suggest that the rental property "could" still be a qualified business regardless of the safe-harbor questions. That could mean simply that you're in it for profit, and that you as the owner are "engaging in regular and continuous activity in relation to the property." (Here's one source seeming to espouse this approach.)

I seem to recall dealing with this for my own rental years ago and it came down on the side of yes, I could take the QBI deduction. But I'm still honestly not sure, and the tax-pro software I'm now using leans more on the side of no. So I'd love to see what you (or others like @cathy63) determine.

 

[cathy63]

I seem to recall dealing with this for my own rental years ago and it came down on the side of yes, I could take the QBI deduction. But I'm still honestly not sure, and the tax-pro software I'm now using leans more on the side of no. So I'd love to see what you (or others like @cathy63) determine.

Since you asked ... as far as I know, the OBBBA changes to QBI don't take effect until 2026, so they're not relevant for the 2025 tax returns we're filing now.

The QBI deduction was part of the TCJA that passed back in 2017, but it wasn't really clear whether owning rental real estate was a qualified business or not. As a result of many requests for rulings and clarifications, the IRS created safe harbor rules for landlords in 2019: IRS finalizes safe harbor to allow rental real estate to qualify as a business for qualified business income deduction | Internal Revenue Service . The 250 hours is part of that safe harbor, but it's not part of the law itself and you can still have a qualified business even if you don't meet the safe harbor. In other words, if you claim the deduction and the IRS audits you then you can either assert that you meet the safe harbor requirements and back that up with contemporaneous records (including logs that show time spent), or that you meet the general requirements imposed by law in which case the records that prove your claim are likely to be inspected more thoroughly.

My guess is that OP's tax software changed its interface this year and is making the safe harbor rules more visible.

For next year, I don't think the rules for when rental real estate is a QB change at all. What changes is there's a minimum deduction of $400 if you work in the business (as opposed to just being an investor) and the income levels where the deduction phases out will be higher.

 

[NeilDH]

Thank you for responding, @cathy63. What you wrote about the QBI deduction reaffirms what I've read elsewhere.

Unfortunately, I'm not sure the safe harbor rules make the situation any clearer. As you say (and I've seen others say), "it's not part of the law itself and you can still have a qualified business even if you don't meet the safe harbor." You can? What are the "general requirements" imposed by law? ("Consistent and regular" participation? As measured by what?)

It sounds like you can put in the 250 hours and log it, then you can put in for the QBI deduction, no problem. Or, you can just put in for the QBI deduction and take your chances that the IRS won't ask, and if they do, you'd show ... what, exactly?

I have a client — technically two clients, a set of parents and a child who share ownership of a rental property — for whom I'm considering the QBI deduction. They almost certainly won't have logged 250 hours, and even if they did, I'm sure they didn't log the hours. So I'm leaning no on the deduction. (We'd have a much better shot if it were 100 hours.)

 

[cathy63]

Unfortunately, I'm not sure the safe harbor rules make the situation any clearer. As you say (and I've seen others say), "it's not part of the law itself and you can still have a qualified business even if you don't meet the safe harbor." You can? What are the "general requirements" imposed by law? ("Consistent and regular" participation? As measured by what?)

The law says "regular, continuous, and substantial" participation. Plus there are a few other clauses that lead to the other requirements referenced in post 1, but I assume your clients meet those.

It sounds like you can put in the 250 hours and log it, then you can put in for the QBI deduction, no problem. Or, you can just put in for the QBI deduction and take your chances that the IRS won't ask, and if they do, you'd show ... what, exactly?

The point is that there's no exact answer to that question. If they didn't put in the 250 hrs but they still want to claim the QBI deduction, then if they get audited they have to show whatever they have that justifies their claim. If the auditor agrees, great. If they don't, you amend the return and they pay the penalties and interest.

If I were in that situation, I would try to show that I'd hired someone else to do some of the work and argue that their hours should count. I'd also include time spent emailing, making phone calls, going to Home Depot, supervising contractors, showing the property to potential renters, attending HOA meetings, etc. It may very well be that they can claim the deduction in some years and not others.

 

[NeilDH]

That's good stuff, Cathy.

So it ultimately comes down to whether the taxpayer and even the tax preparer have the stomach for it. I see in other discussions plenty saying no way, and plenty saying sure you can.

 

[audreyh1]

What about passive QB income from investments, funds, etc. will those still allow the QBI deduction? Or is it only for active owners?

 

[NeilDH]

What about passive QB income from investments, funds, etc. will those still allow the QBI deduction? Or is it only for active owners?

The separate REIT component, and PTP income from SSTB component, of the QBI deduction remain. It's the passive REIT income from investments and funds that comes up most for that part of the deduction, even when you weren't aiming for it.

 

[audreyh1]

The separate REIT component, and PTP income from SSTB component, of the QBI deduction remain. It's the passive REIT income from investments and funds that comes up most for that part of the deduction, even when you weren't aiming for it.

Yes, I get plenty of QBI from my index funds. What I’d asking is whether there is any difference in how that passive QBI is treated tax wise in 2026+.

 

[cathy63]

Yes, I get plenty of QBI from my index funds. What I’d asking is whether there is any difference in how that passive QBI is treated tax wise in 2026+.

The law did make some changes in what securities the funds that pay Sec 199A dividends are permitted to hold. This might have some impact on the amount of dividends you receive (not sure if it would be more or less), but it won't affect how or where you put the numbers on your tax return.

 

[NeilDH]

Here's another one for you, @cathy63 or anyone, about my same clients:

The two parents and their daughter bought a house, ownership split three ways. She is a FT student, age 20 in 2025. She lives in the house with two roommates, who are renting rooms. She does not go back to live with the parents anymore. (They're all in the Chicago area, so not hugely far apart.) For the parents, this is a "second home."

With scholarships plus parents handling tuition, fees and other costs, mostly through 529s, not to mention the house down payment in 2025, parents are providing more than half of support. Student moved into the house May 12.

So the question is, *could* the child still be a dependent on the parents' return, with in mind the residency test of living with parents more than half the year?

I'm thinking that it's unlike a situation where the child has an apartment all year at college and they'd still be "temporarily" away from home, or even where the parents entirely bought the child a home. Since the child is part-owner of this house, it's now her *primary* residence, so she fails the residency test on the parents' return.

This despite an argument I've seen that the parents are providing most of the support, therefore she could still be a dependent.

What do you think?

 

[cathy63]

So the question is, *could* the child still be a dependent on the parents' return, with in mind the residency test of living with parents more than half the year?

There are two ways she could be a dependent: qualifying child or qualifying relative. Owning a house doesn't disqualify her from being a qualifying child, but if her parents' home is no longer her home then that does.

To be their qualifying child she has to:
- be a full-time student for at least 5 months of the year
- live with her parents for more than half the year
- not provide more than half of her own support

To be their qualifying relative she has to:
- have over half her support provided by the parents
- have less than $5200 of income other than non-taxable things like social security or disability

If you answer this questionnaire as if you were the parents, you should get an official answer: Whom may I claim as a dependent? | Internal Revenue Service

 

[NeilDH]

"Owning a house doesn't disqualify her from being a qualifying child, but if her parents' home is no longer her home then that does." I'm understanding from a few sources now that the home's ownership doesn't make a difference, and that it's whether the child ever goes back home (with the parents). Thank you again, @cathy63.

I think tricky in my client's case to argue for a dependent ruling (as qualifying child) since the two homes are in the same metro area. Whereas if the parents and/or student had bought a place in another metro area, you could understand how the student would live back "home" maybe during summers and holiday breaks. (And they'd just have this second property sitting there unused sometimes — which happens.) Like that interview says, it'd have to be "reasonable" to assume that the child returns to the parents' home. Leaving it to our judgment could be dangerous!

(Student won't pass as a qualifying relative, btw, because of income.)