For 2018 Taxes, what is QBI and how do you qualify a profitable rental as QBI?

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Submitted by flu on April 3, 2019 - 10:24pm

I stumbled across this in TurboTax while working through my rental properties....I was curious if someone can explain what QBI is and how it can be used to allow one to pass through positive rental income at the 20% tax rate, assuming you are net positive income on rental property(ies).

This seems really complicated and I haven't done enough research yet. Anyone have the cliff notes version?

According to TurboTax


What is a qualified business?
Beginning in 2018, taxpayers may receive a tax deduction of up to 20% of "qualified business income" (QBI). In order for income to be eligible for this deduction, there are a few criteria that must be met. If the activity doesn't meet these criteria, it won't be eligible for this deduction, meaning your taxes will probably be higher. (However, in cases where an activity generates a loss for tax purposes, then being eligible for this deduction might actually increase your taxes since it could reduce the deduction you're eligible for from other activities.)

1) The activity must be a "trade or business." Unfortunately, there is no specific test of what qualifies as a trade or business. The basic definition established by the courts is that an activity must be carried on with the primary intent of making a profit, as well as with regularity and continuity. (More on this later.)

2) The activity must be US-based. If your business sells products or provides services in the United States, the profits (or losses) from this business are generally US-based. Goods sold abroad and services provided abroad will generally also count as US-based if they are delivered from a US base of operations to a country where the business has no base of operations.

3) The income must not be "wages." For purpose of this test, wages generally includes all payments you receive as an official employee of a business (i.e. wages reported on a W-2). However, there are two special cases. If you're a statutory employee (indicated by the "statutory employee" box on line 13 of your W-2 being checked), then the income from the statutory W-2 is not considered wages for QBI purposes. Also, in some cases payments you receive from a former employer may be treated as wages even if that employer no longer consider you an employee. If this business includes payments received from a company that employed you in the last three years, then those payments might be considered wages by the IRS.

How much "regularity and continuity" is necessary for an activity to be treated as a "trade or business?"
In some cases, this can be a tough question to answer.

Generally, if you're providing services or selling products with the intent to make a profit, and you're reporting this as "Business" or "Self-employment" income (Schedule C) or "Farm" income (Schedule F), this is going to be treated as a regular and continuous business eligible for the QBI deduction. If you receive payment for a "one off" or very occasional service, and you report this as "other income" rather than a self-employment or business activity, this would not be considered a qualified business.


However, if you are renting out property or receiving royalties from an investment that are reported on Schedule E (or in some cases related to farm rentals, Form 4835), the question of whether this is a "trade or business" is often not clearly answered by the IRS. There is one instance where this type of activity is definitely a trade or business. Rents or royalties that are paid to a trade or business that is also at least 50% owned by the same person (or people) who owns the property generating the rents or royalties are automatically defined as a trade or business.

Outside of that specific situation, 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." (See examples later of activities that would or would not typically be treated as trades or businesses.)

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."

Examples
1) You rent a piece of bare land you own to a long-term tenant. You don't provide or maintain any improvements to the land. The tenant is responsible for any improvements. There is very little that needs to be done to collect income from this property besides depositing monthly checks. This type of activity is typically not classified as a trade or business. (Note that farm rentals reported on Form 4835 would commonly follow this fact pattern.)

2) You receive income from a net lease of a small office building you own in which the tenant is responsible for substantially all maintenance and upkeep of the property. As in the first example, about the only regular activity required from this activity is depositing rent checks. This type of activity is typically not classified as a trade or business.

3) The facts are the same as the second example, except in this case the tenant is your own S Corporation that you own 100%. The S Corporation uses the leased building as its office and is responsible for all maintenance and upkeep of the property. Even though the office wouldn't normally be considered a trade or business because of the lack of regular activity, in this case the office lease IS a trade or business because you own both the office building and the business renting it.

4) You own a vacation home which is rented out most weeks year-round to new tenants who typically stay for a week or less. Because of the frequent interactions required with tenants, this type of activity would typically be classified as a trade or business.

5) You own a large building with many different units and tenants. At any given time, there is often a tenant moving out or space that's open and needs a tenant to be found. Maintaining the building to the standards expected by the many tenants is an on-going task. You have hired a management company that handles all of these on-going tasks on your behalf. Because of this regular and continuous activity (even though some or all of it may be conducted by agents you've hired to act on your behalf), this type of activity would typically be classified as a trade or business.

Submitted by flu on April 3, 2019 - 10:57pm.

Not that do this but from #4, ...If I am reading this correct, if you run an AirBnb/Vrno business, income taxed at a cap of 20% under QBI ????

In general, I think the IRS recently released a safe harbor for real estate enterprise

http://anderscpa.com/rental-real-estate-...

Submitted by Myriad on April 3, 2019 - 11:06pm.

I think if you know the rules in detail for QBI, you could probably start your own tax practice.
I thought the tax reform was supposed to simply taxes...

Back to the question, this website has really good info on various tax topics.
https://www.kitces.com/blog/irs-notice-2...

The IRS issued this
https://www.irs.gov/pub/irs-drop/n-19-07...

Submitted by flu on April 4, 2019 - 8:06am.

Based on the QBI REEE safe harbor rules I think I could elect to treat my rental income as QBI.

But are any of you planning to do this that already ran it by a CPA/accountant? I have some basic questions on how you would go about doing this.

Dumb questions are...

1. Do the properties need to be in any sort of holding entity like a LLC, scorp, etc ..or can they simply be held in your name or your trust's name.

2. my preliminary understanding is you can treat all your property as one REEE or each property separately as REEE.

3. For a property that has a net loss after depreciation deductions, is it better to exclude this property as an REEE or include it? Which has a better tax outcome.

4. For a property not specified as a REEE for QBI this year, can I simply add it the following year assuming I meet the safe harbor rules for all my properties....

5.What are the rules for removing a propoerty from your REEE to have them not considered under QBI in years after....is it allowed.

Submitted by spdrun on April 4, 2019 - 1:56pm.

Wouldn't you have to claim the properties on Schedule C and pay self-employment tax to qualify as QBI?

Submitted by FlyerInHi on April 4, 2019 - 5:02pm.

Social Security/self employment tax is capped at $132k.

Submitted by henrysd on April 5, 2019 - 8:24am.

The bar for treating rental income as QBI seems to be quite high for those with regular job not in real estate fields. I got this from TurboTax site:
https://ttlc.intuit.com/questions/455753...

Quote:
Generally, this means each rental real estate enterprise (a rental property or group of similar rental properties, including K-1 rental income) must satisfy these requirements:

1. Each enterprise has its own books and records to track income and expenses;
2. At least 250 hours of rental services are performed per year per enterprise; and
3. (Starting with tax year 2019) Contemporaneous records of services performed are kept which includes who performed the service, description of service, the date of the service, and how long it took (who, what, when, and how long).

Submitted by flu on April 5, 2019 - 10:15am.

henrysd wrote:
The bar for treating rental income as QBI seems to be quite high for those with regular job not in real estate fields. I got this from TurboTax site:
https://ttlc.intuit.com/questions/455753...

Quote:
Generally, this means each rental real estate enterprise (a rental property or group of similar rental properties, including K-1 rental income) must satisfy these requirements:

1. Each enterprise has its own books and records to track income and expenses;
2. At least 250 hours of rental services are performed per year per enterprise; and
3. (Starting with tax year 2019) Contemporaneous records of services performed are kept which includes who performed the service, description of service, the date of the service, and how long it took (who, what, when, and how long).

I don't think these bars are high at all. They are certainly lower than the bars set to claim you are a real estate professional that allows you to pass through your rental income losses completely to offset income from other sources... That , the IRS stipulates you must spend at least more than 50% of your time to managing your real estate plus other stringent tests.

The bulk of QBI seems to be documenting you actually spent more than 250 hours with handling your real estate. That's roughly 12% of a normal person's 40hr/week job.

One might not spend 250 hours on one property, but I am fairly confident that I spent well more than that across all my properties..

For each property, you should already be tracking expenses anyway, and for tax purposes , you should be tracking mileage and time spent dealing with all sorts of things.... I think the only thing is how do you define your REEE? Do you define a seperate REEE for each property, all properties, or some combination there of?

Also, there doesn't appear to be any requirement that you need to hold the property in specific entities like an scorp, ccorp, LLC, at least not from what I read so far....

Submitted by 4scommon on April 7, 2019 - 5:50pm.

Hello,

I have a rental property that I manage i.e. I find tenants, I sign the lease. Its typically an yearly lease,  I take care of or employ handyman to attend to maintenance issues or repair needs etc. My tenants call/txt me all the times for any issues, so I do spend time attending to those as well as any repair visits. I don't have documentations to prove each of them or quantify the time spent.  .Do I meet the safe harbor rule of 199-A? Per the IRS pub, even if one doesn't fit into 199-A safe harbor rule, he or she can still declare the rental as business as long as burden of proof is met.

Can I claim the QBI deduction? This is the first time turbo Tax questionnaire promoted me to claim QBI deduction. 

Pl advise.

Submitted by Myriad on April 8, 2019 - 11:09am.

Rental services for purpose of this revenue procedure include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and repair of the property; (vi)
management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors.
Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners. 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.

You should start documenting the hours spent. For 2018, you can estimate and claim ignorance. The probability is that the IRS isn't going to audit this for 99.9% of rental property owners. The worst thing that can happen is that you pay back the QBI reduction.

Submitted by flu on April 8, 2019 - 5:19pm.

I am on vacation skiing before the season ends. Unfortunately, this means I won't be doing my taxes on time. Looks like October extension for me. I think what I'll do is before October, I'll file as I normally do, and then I'll file an amendment with QBI later, after I talk to an accountant.

From what I can tell, the homes don't need to be held in any specific entity, like a corp, LLC, etc... Can someone confirm this from a CPA? If not, I'll ask when I go in...
There's a couple of other questions I wanted clarification on related to the new tax law changes.... For one, I'm.sitting with a lot capital gains in a 529k account that I want to take distributions now for my nieces and nephews attending k-12 private school, and wanted to confirm one more time I can gift that tuition to them and their parents gift my kid back below the estate tax threshold.

oh, and for the first time in a long time, I don't owe taxes, I think I get a refund. I don't know what changed.... maybe my taxes went down this year.....weird

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