You may notice this tax season that many of your clients have taken advantage of the 2021 housing market and either purchased rental property or started a rental property enterprise. A rental property enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in a single property or interests in multiple properties.
Rev. Proc. 2019-38 provides a safe harbor for determining when a rental real estate enterprise may be treated as a trade or business for purposes of QBI. There are some types of property that are not eligible for the safe harbor. In terms of tax benefits, owning a rental property (or properties) can provide some tax benefits.
For clients who have a rental property enterprise, and meet the requirements under the safe harbor, will be treated has having a trade or business for purposes of the qualified business income (QBI) deduction. For those clients who do not meet the safe harbor, they may still qualify as a trade or business if the §199A regulations are met.
Rental property decision tree
Here’s a handy flowchart that will help you decide if your clients’ real estate rental enterprise qualifies for the QBID safe harbor.
Activities that are qualifying time for safe harbor include:
- Advertising to rent or lease the real estate
- Negotiating and executing leases
- Verifying information contained in prospective tenant applications
- Collecting rent
- Daily operation, maintenance and repair of the property
- Managing real estate
- Purchasing materials and supplies
- Supervising of employees and independent contractors
For more information on this topic and how to best use this flow chart, register for our Determining Tax Treatment of Rental Property on-demand webinar.