• by admin
• November 28, 2023

Claiming a deduction your income tax return reduces your taxable income and you pay lower income tax on your taxable income. You may qualify for Qualified Business Income (QBI) Deduction which reduces your taxable income up to 20%.

 

Qualified Business Income (QBI) Deduction Summary

• This is also known as Section 199A deduction
• If you are an owner of pass-through businesses, you can deduct up to 20% of your share of qualified business income
• Limitation – Your 2023 taxable income should be below $182,100 for single or $364,200 for married filing jointly before qualified business income deductions
• You claim your deduction on Form 8995 or 8995-A

 

Examples of pass-through business entities used in real estate include

• Sole proprietorship(self-employed)
• S Corporation
• Limited liability company (LLC)
• Limited partnership (LP)
• Estate or Trust
• Publicly traded partnership (PTP)
• Real estate investment trust (REIT)

 

Types of income that are considered qualified business income

• Income from pass-through entity, including proprietorship income
• Dividends from real estate investment trust (REIT)
• Income or loss from publicly traded partnership (PTP)
• Income from Rental real estate enterprise (RREE)

 

What is considered a RREE?

The taxpayer’s primary purpose is to generate a profit from the rental property business, and your involvement in this business has been continuous. In this scenario, a rental real estate enterprise (RREE) has been considered to be established for each rental property or group of similar properties (such as a group of single-family rentals). The taxpayer should note that commercial and residential properties may not be part of the same enterprise.  You cannot vary this treatment from one year to another unless there has been a significant change in facts and circumstances.

 

HOW DO I DETERMINE IF AN RREE IS ELIGIBLE FOR THE QBI DEDUCTION?

Once an RREE has been established, the taxpayer must determine if they qualify as a ‘trade or business’ and are eligible for the Qualified Business Income (QBI) deduction.

You may need to look into “Safe Harbor Tests” and see if the following requirements are met for the particular tax year and your RREE should be considered as a “trade or business” for the purposes of the QBI deduction:

• You have maintained separate books and records for each RREE
• You have performed 250 or more hours of rental services for each RREE
• You have maintained records for the tax year documenting hours of service, services performed, dates of service, and who performed the services

 

For purposes of the 250 hour rule, the following are considered rental services:

• Advertising to rent or lease real estate
• Negotiating or executing leases
• Verifying information in prospective tenant applications
• Collection of rent
• Daily operation, repairs and maintenance
• Management of the real estate
• Purchase of materials
• Supervision of employees and independent contractors

 

Last but not the least, you should also be aware of the followings or you may need to contact a tax professional.

• If you are using your property as a residence for any part of the year you may not qualify for QBI
• Your RREEs may qualify as a trade or business for purposes of the QBI deduction even if they fail to meet the safe harbor tests
• If you are renting your property under a triple net lease is not eligible for this safe harbor

—Triple net leases between related parties with common control (50% or more) generally qualify for the QBI deduction

—Taxpayers making the safe harbor election must include a statement with their tax return indicating they have met all safe harbor requirements

—Income earned by a C corporation or by providing services as an employee is not eligible for the deduction.

 

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

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