QBI and Vacation Home

[Kram BergGold]

T/P rents a vacation home 35 days and uses it personally for 70 days. The net rent is a positive $1,000. I am thinking this should not be considered as QBI. Looking to confirm.

[TAXNJ]

See if this applies:

https://forum.thetaxbook.com/forum/d...qbi-and-rental

ALSO:

https://www.trustbgw.com/blog/2019/10/03/tax-benefits-rental-property/

[TaxGuyBill]

The article from that second link is filled with errors, so you may not want to rely on that. :-)

[TAXNJ]

What are some of the “filled with errors”? Recognizing that it is an 2019 (oct) article as the author states tax laws change.

I will ask the author if there is an update to some of the errors once you provide them.

[rbynaker]

I wouldn't necessarily say "filled with errors", more like "omits significantly relevant information to the extent that it may cause the reader to reach an incorrect conclusion."

The two most significant issues I see:

1) The article seems to base everything on the safe harbor. The IRS has clearly stated that a rental activity can rise to the level of a trade or business based on facts and circumstances without meeting the safe harbor. With the term "trade or business" never actually defined in the tax code, we're left searching court cases for facts that may be in the taxpayers favor.

2) The article seems to imply that any real estate trade or business is subject to self-employment tax. Rental real estate activities land in one of three buckets. a) Section 212 "production of income"--this is specifically NOT a trade or business so QBI DOES NOT apply. The extreme example of this is a triple net lease, but facts and circumstances of each situation will land somewhere on a spectrum covering all three buckets. b) Section 162 rental real estate business excluded from SE tax under regs 1.1402(a)-4(c)(1)--this is still on Sch E but DOES qualify for a QBI deduction. And c) Section 162 rental real estate activity where substantial services are provided, subject to SE tax under regs 1.1402(a)-4(c)(2)--this is on Sch C and Sch SE and qualifies for the QBI deduction.

A better article might be this one (although I personally find Tax Advisor articles a bit cerebral):

https://www.thetaxadviser.com/issues...tbusiness.html

In our particular thread here, I doubt Mark's case would rise to the level of a trade or business but like anything it's going to depend on facts and circumstances. This could be 5 weekly renters which is probably sporadic, does not take a significant investment in time, and is likely not a trade or business. Or it could be an airbnb operated like a bed & breakfast with a meal every morning and daily maid service which is likely business income subject to SE tax.

If you really want to dig into court cases, Groetzinger is a good read (and explains fairly well just how inconsistent court cases have been dating back to 1911). Follow the link below and click on "Case" to read the full SCOTUS opinion:

https://supreme.justia.com/cases/federal/us/480/23/

But don't hold your breath looking for any particular "bright line" test you can use. The "best" definition (although I'm reluctant to call it that) might be found by searching for the second instance of "Whipple":

"We accept the fact that, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity, and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify."

Even that just leaves us debating the meaning of the undefined terms "continuity", "regularity" and "sporadic." And I suppose we could even debate the term "primary purpose."

Rick

[New York Enrolled Agent]

If you really want to dig into court cases, Groetzinger is a good read

But don't hold your breath looking for any particular "bright line" test you can use. The "best" definition (although I'm reluctant to call it that) might be under Whipple:

"We accept the fact that, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity, and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify."

Rick - not trying to nit-pick but the "definition" you cite is from Groetzinger itself and not Whipple. Whipple is cited in the text prior to the Supreme Court's "definition" in Groetzinger.

The importance of Groetzinger cannot be overstated. In the final QBI regulations only two court cases were noted - both Supreme Court cases, Higgins and Groetzinger.

[rbynaker]

Rick - not trying to nit-pick but the "definition" you cite is from Groetzinger itself and not Whipple. Whipple is cited in the text prior to the Supreme Court's "definition" in Groetzinger.

The importance of Groetzinger cannot be overstated. In the final QBI regulations only two court cases were noted - both Supreme Court cases, Higgins and Groetzinger.

Thanks for the clarification, I'll update my post accordingly.

[TAXNJ]

I wouldn't necessarily say "filled with errors", more like "omits significantly relevant information to the extent that it may cause the reader to reach an incorrect conclusion."

Rick

Your reply post (on behalf of your reply poster client) is good and will receive a “like” for your effort.

Your statement of “I wouldn't necessarily say "filled with errors", more like "omits significantly relevant information to the extent that it may cause the reader to reach an incorrect conclusion." can also be applied to the article you referenced (without the smile face) and also can be said with many reply posts. Have you heard of the saying "Those who live in glass houses should not throw stones " - you never know when it is your turn.

That is why many posters should continue their own research to make a decision for their scenario.

You bring out some interesting points of the article which maybe different today since tax clarification may or may not resulted since the October 2019 article. The same may or may not be said about the earlier article (April 2019) you reference. As you state “In our particular thread here, I doubt Mark's case would rise to the level of a trade or business but like anything it's going to depend on facts and circumstances”, that statement can applied to both articles.

A key point is, The author of the article you present states “Unless the IRS provides more guidance to distinguish separate trades or businesses, taxpayers may find themselves in considerably more controversy with the IRS on what is a trade or business.” Question to you is: has the IRS provided more guidance since that statement was made ?

As far as Safe Harbor rules, one can reference, IR-2019-158, September 24, 2019 — The Internal Revenue Service today issued Revenue Procedure 2019-38 that has a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).

There are many posts and reply posts on The Tax Book website one can reference regarding QBI & Rentals e.g., posts on 2-27-19 and 3-17-20 which still may be correct or may not and needs updating (you might even be in one of the posts).

To Original Poster see info below can help with your post.

So, below is some of the latest information on QBI & Rentals shared by the IRS (Sept - 2020) if anyone is interested (source IRS)

What is QBI?
• Net amount of income, gain, deduction, and
loss from any qualified trade or business.
• May be generated by:

• Sole proprietorships,
• S corporations,
• Partnerships,
• Trusts, and
• Estates

Net amount of income, gain, deduction, and loss from any qualified trade or business.
•Includes, but is not limited to, the deductible portions of:

• S/E tax
• S/E health insurance
• Contributions to qualified retirement plans
• Unreimbursed partnership expenses
• Business interest allocable to S corporation or partnership

Rentals may qualify for the QBID if:

1. The rental or licensing of property is to a commonly controlled trade or business operated by an individual or passthrough entity, sometimes referred to as a self-rental,

2. The rental real estate enterprise meets the requirements, and the taxpayer chooses use of, the safe harbor in Rev. Proc. 2019-38,

3. The rental rises to the level of a section 162 trade or business.

Key Points:

• The W-2 Wage and UBIA of qualified property limitation and the SSTB limitation do not apply to taxpayer's whose taxable income is at or below the threshold
• There are three ways a rental may be qualified for purposes of section 199A:
• Self-rental under Treas. Reg. 1.199A-1(b)(14)
• Eligible for and relying on the safe harbor in Rev. Proc. 2019-38
• Rising to the level of a section 162 trade or business
• The determination of whether a trade or business is an SSTB is based on the facts and circumstances specific to that trade or business.
• Multiple trades or businesses may be aggregated if they meet the rules for aggregation as outlined in Treas. Reg. 1.199A-4.
• Once aggregated, the aggregation must be consistently reported and applied, unless there is a significant change such that the aggregation requirements are no longer satisfied.