This article will assist you with understanding the QBI rental real estate safe harbor election, along with how it applies to Lacerte and ProConnect Tax functionality.
Tax law basics
The Tax Cuts and Jobs Act established a new, 20% Qualified Business Income (QBI) Deduction for sole proprietorships, partners in partnerships S corporation shareholders, trusts and estates. The QBI deduction is subject to limitations when taxable income is above $315,000 for joint filers and $157,500 for other filers.
IRS Notice 2019-07 establishes a new safe harbor for rental real estate. Individuals and entities owning rental real estate can treat a rental real estate enterprise as a trade or business for QBI purposes if they meet certain requirements.
A rental real estate enterprise is an interest (owned directly or through an entity) in real property held for the production of rental income and may consist of an interest in multiple properties. If an enterprise fails to meet the safe harbor, it may still qualify for QBI as long as trade or business standards are met.
Safe harbor requirements
- Maintenance of separate books and records to report income and expenses of each rental real estate enterprise.
- For tax years beginning before January 1, 2023, 250 or more hours of rental services must be performed each year.
- Beginning on January 1, 2019, the taxpayer must maintain records with details about the services, including hours, description, dates and who performed the services.
- The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.
Refer to IRS News Release IR-2019-158 for more information.
Rental services include advertising, negotiating and executing leases, verifying tenant applications, collecting rent, daily operation, maintenance and repairs, property management, purchasing materials and supervising workers. Rental services may be performed by owners, employees, agents, or independent contractors. The taxpayer must sign and attach a statement to the tax return showing the requirements have been met.
Rental scenarios that are not eligible for the safe harbor: IRC section 280A (personal use of a dwelling including vacation homes) and triple net leases (tenant pays taxes, fees, insurance and maintenance).