20% deduction for rental income!

19 Replies

This came out this morning from the National Association of Realtors!

Tax Win: IRS Provides Clear Test on How 20% Deduction Applies to Rental Income, Exchanges

The Internal Revenue Service has issued final rules on the 20 percent business income deduction (Sec. 199A of the Tax Code) that was enacted in late 2017 as part of the Tax Cuts and Jobs Act.

Among other things, the rules confirm that the deduction applies to your business income, as a real estate agent or broker, if you operate as a sole proprietor or owner of a partnership, S corporation, or limited liability company. It applies even if your income exceeds a threshold set in the law of $157,500 for single filers and $315,000 for joint filers.

In addition, the rules provide guidance that NAR has been seeking on two other provisions of importance to you: 1) whether any real estate rental income you have is eligible for the deduction, and 2) how the deduction applies to properties you've exchanged under Sec. 1031 of the tax code.

Eligibility of rental income
If you generate rental property income, that income can also qualify for the new deduction, as long as you can show that your rental operation is part of a trade or business. The IRS has released proposed guidelines that include a bright-line test, or safe harbor, for showing that your rental income rises to the level of a trade or business. Under that safe harbor, you can claim the deduction if your rental activities—which include maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities—total at least 250 hours a year. If your activity totals less than that, you can still try to take the deduction, but you'll have to be prepared to show the IRS that your activity is part of a trade or business.

Eligibility of 1031 like-kind exchanges
Under earlier proposed regulations, if your income was above threshold levels set in the tax law—$157,500 for single filers, $315,000, for joint filers—and you had exchanged one property for another to defer taxes under Sec. 1031 of the tax code, the amount of the new deduction might be reduced because of the swap. NAR and other trade groups reached out to the IRS to change this treatment, and the IRS has made that change. Under the final rules, you can use the unadjusted basis of the depreciable portion of the property to claim at least a partial deduction.

"The final rules are the result of several months of advocacy and collaboration between NAR, our members, and the administration," says NAR President John Smaby. "They reflect many changes that NAR sought to ensure the new 20 percent deduction applies as broadly as possible."

# Milwaukee

@Marcus Auerbach

"It applies even if your income exceeds a threshold set in the law of $157,500 for single filers and $315,000 for joint filers."

Correct, as an agent/real estate broker business is not a 'specified service trade or business' (SSTB).  However above the 'threshold amounts' that you detailed, a limitation is phased in and your QBID may be limited by W-2 wages and/or UBIA of qualified property of the trade or business.

Make sure that you're communicating with your CPA regarding optimal tax entity type under the TCJA.

@Eamonn McElroy - okay, I'll have my CPA translate that for me ;-)

Our rental portfolio is definitley run and set up as a business and would pass a bright line test.

We will definitley will be running different entity scenarios for 2019 to see which one works best in the new tax environment, but I am past the point where I understand all the nuts and bolts my CPA is talking about..

@Marcus Auerbach

You should reach out to your accountant for proper planning.
Since many rentals operate at a loss, it may actually be disadvantageous to have the rental income to be classified as Qualified Business Income.

I have been running my rental properties as an individual -- no S-Corp, LLC, etc.

To qualify for the 20% deduction must I have one of these entities in place?

Thank you,

Arla C Meyer

Originally posted by @Arla C. Meyer :

I have been running my rental properties as an individual -- no S-Corp, LLC, etc.

To qualify for the 20% deduction must I have one of these entities in place?

Thank you,

Arla C Meyer

Nope. 


No entity required. 

You just must not be a C corp. 

And must have qualified business income (with rentals this means them either meeting the safe harbor, or meeting the definition of a trade or business per IRC 162) 

Your tax pro can work out all the logistics for you.

Wait. Can you take the 20% deduction in rental income BEFORE you deduct the expenses? I will technically be taking a loss on my rentals this year, with the depreciation and what have you. But obviously I'd like to lower the rental income before I even deduct my expenses. 

Originally posted by @Anthony Wick :

Wait. Can you take the 20% deduction in rental income BEFORE you deduct the expenses? I will technically be taking a loss on my rentals this year, with the depreciation and what have you. But obviously I'd like to lower the rental income before I even deduct my expenses. 

No. You have to have qualified business income to apply the 20% to. If the rentals generate a loss no benefit this year.

Originally posted by @Basit Siddiqi :

@Marcus Auerbach
Since many rentals operate at a loss, it may actually be disadvantageous to have the rental income to be classified as Qualified Business Income.

Exactly. Just ran in to this situation. Is it acceptable to selectively take QBI on some, but not all, of your rentals?

QBI deduction is taken at the individual property level. Supposed you have 10 rentals on your schedule E. Five of them show a net gain for the year, five of them show a net loss. You then go and elect QBI deduction on the 5 properties showing a gain. Your tax liability has now dropped, because 20% of that gain is no longer taxed. GREAT. But then, you go elect QBI deduction for the five properties showing a loss. Your tax liability has now gone back up, because 20% of that loss is no longer being counted towards your losses. So the question is, can you "properly" take QBI on your rentals with a gain, and skip the QBI deduction on your properties with losses? Seems sketchy, however the deduction is meant to help property owners, not hurt them.

Originally posted by @Cole A. :
Originally posted by @Basit Siddiqi:

@Marcus Auerbach
Since many rentals operate at a loss, it may actually be disadvantageous to have the rental income to be classified as Qualified Business Income.

Exactly. Just ran in to this situation. Is it acceptable to selectively take QBI on some, but not all, of your rentals?

QBI deduction is taken at the individual property level. Supposed you have 10 rentals on your schedule E. Five of them show a net gain for the year, five of them show a net loss. You then go and elect QBI deduction on the 5 properties showing a gain. Your tax liability has now dropped, because 20% of that gain is no longer taxed. GREAT. But then, you go elect QBI deduction for the five properties showing a loss. Your tax liability has now gone back up, because 20% of that loss is no longer being counted towards your losses. So the question is, can you "properly" take QBI on your rentals with a gain, and skip the QBI deduction on your properties with losses? Seems sketchy, however the deduction is meant to help property owners, not hurt them.

This is why you should have a tax pro for this scenario. It's not a simple calculation. 

It's applied to each real estate enterprise. 

You can't pick and choose. You need to apply the same 162 test to all or none. You can't pick and choose. Either you're treating them like TB or you're not. 

Originally posted by @Natalie Kolodij :

You can't pick and choose. You need to apply the same 162 test to all or none. You can't pick and choose. Either you're treating them like TB or you're not. 

Technically you can pick in choose in Turbo Tax (and probably the other software). Perhaps they should be locking it down to all schedule E properties or none. But then you get in to complexities where you're only a minority owner on a particular property and you have no interaction with anything related to the property.

@Cole A.

You're conflating multiple rental properties with multiple trades or business....and software like TurboTax that's struggling to implement these changes isn't helping.

The QBI determination is made on each trade or business.  Not each rental.

The rules surrounding IRC Sec 199A are intricate and complex.  2018 might be a good year to get some quotes from a tax CPA/EA.

I foresee a lot of 2018 amended returns in a year or two that were DIYed via TurboTax et al.

Originally posted by @Eamonn McElroy :

@Cole A.

You're conflating multiple rental properties with multiple trades or business....and software like TurboTax that's struggling to implement these changes isn't helping.

The QBI determination is made on each trade or business.  Not each rental.

The rules surrounding IRC Sec 199A are intricate and complex.  2018 might be a good year to get some quotes from a tax CPA/EA.

I foresee a lot of 2018 amended returns in a year or two that were DIYed via TurboTax et al.

I don't doubt Turbo Tax and the like have kinks to work out. I just read an older mudslinging thread talking about that. Nonethless, I'm not conflating a business with a rental, though. The only place in Turbo Tax to elect QBI is within each real estate asset. And when you elect yes or no, it is only applying to that particular assets loss or gain. Not the other assets. So are you telling me they put the QBI election in the entirely wrong section? 

@Cole A.

I don't use TurboTax, so I'm not looking at what you're looking at.

Regardless...TurboTax is a software company.

All I'm saying is that most taxpayers who own rentals directly are generally involved in one trade or business, that of rental real estate, and if so the QBI, W-2 wages, UBIA from all rentals are summed up to reflect the one trade or business.  That is the way IRC Sec 199A and the related regs read, and that is what matters.  Not how TurboTax chooses to program their software.

Even with professional level software, the kinks are still being worked out even now.

You have to know what you're doing in order to use it.  It's like old school programmers say "garbage in, garbage out".

Well, here is a throw back to a book I red 11 years ago and started the whole thing for me. One of the key points of Rich Dad Poor Dad is to hire smart advisors. If you are doing taxes yourself or using Turbo Tax you are missing a key poit of being an investor.

I did taxes and books myself as long as I could, so I understand the basics, but once you work with a tax professional you start to realize you've been kidding yourself!

Doing my own books was another desaster I'd rather not think about too much. I bought QB and spent a year learning it from YouTube videos. My rational was that I should really know my own numbers. Needless to say my books were super basic and I dreaded the work every month so much - hiring a book keeper was one of the happiest days in my life. I am not even kidding. 

@Michael O'Brien - Just to give you a feel for it - the 250 hours break down to about 5 hours a week or an hour a day Mo-Fr. If you have a few properties you will spend that amount of time quickly just on paperwork. And this is NOT per rental property, but in total. I thought that's a pretty low threshold. I am not sure about Airbnb, maybe someone else can answer that one.