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.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.