Rental real estate and Qualified Business Income in Lacerte

This article will help to understand why rental real estate income isn't included in the Qualified Business Income (QBI) calculation and the recommended steps.

Based on the IRS Pub. 535, Schedule E rentals are not included as Qualified Business Income, unless the activity is marked as Land or Self-Rental.  However, Lacerte provides two ways to indicate rental real estate income should be included in this calculation:

To indicate the taxpayer is a real estate professional:

1. Go to Screen 18, Rental & Royalty Income (Schedule E).
2. Locate the applicable activity in the left panel, if multiple activities are present.
3. In the General Information section, select the box for Real estate professional (code 32).

To override the treatment of rental income:

1. Go to Screen 18, Rental & Royalty Income (Schedule E).
2. Locate the applicable activity in the left panel, if multiple activities are present.
3. Scroll down to the Qualified Business Income Deduction section.
4. Enter a 1 in the field Business is a qualified trade or business: 1=yes, 2=no [O] (code 451).

In addition, Notice 2019-07 provides a Safe Harbor under which rental real estate enterprise will be treated as a trade or business for purposes of the QBI deduction.

To indicate Safe Harbor on rental real estate:

1. Go to Screen 18, Rental & Royalty Income (Schedule E).
2. Scroll down to the Qualified Business Income Deduction section.
3. Enter the field Rental real estate enterprise number if claiming safe harbor.

Once complete, the QBI Rental Real Estate Safe Harbor statement will generate in your Forms view.  This statement needs to be signed by the taxpayer and attached as a PDF when e-filing.

To generate one Safe Harbor Election for a group of businesses, see Lacerte Aggregation of Business Operations Section 1.199A-4.

To attach a PDF copy of the signed Safe Harbor Election statement:

1. Go to Screen 4, Electronic Filing > e-file PDF/Miscellaneous.
2. Select Attach PDF and browse to your PDF copy of the signed Safe Harbor Election statement.
3. Enter a description in the field Description of file.
4. Using the dropdown in the field Link to form (defaults to main form), and select Other.
5. Within Other, select QBI Rental Real Estate Safe Harbor Election Statement.
6. Enter the applicable activity name or number in the field Activity name or number (e.g. 3=3rd Form 3115).

If you don't select the correct Link to form (defaults to main form) the following diagnostic will generate:

• e-file: Schedule E #: The safe harbor election was claimed for this rental property. Pursuant to IRS Notice 2019-07, a signed statement PDF must be attached to the return stating that all qualifications for the safe harbor have been met. (ref. #51860)

Resources:

• IRS Pub. 535
• Section 199A Regs (page 15)