QBI for one residential rental - audits?

[Rapid Robert]

I recall reading somewhere or other a lot of discussion back in 2018 and thereafter, about whether or not a landlord with a single residential rental was eligible for QBI deduction. My conclusion from all the discussion was that yes, the landlord is. Any anecdotes to the contrary, regarding IRS inquiries?

[JON]

Agree with YES

[terryats]

For only one rental I would use " safe harbor" see link. https://www.irs.gov/newsroom/irs-fin...come-deduction

[TaxGuyBill]

I definitely lean the other way - one rental is rarely a 'business', at least for ?162 purposes (quite annoyingly, "business" isn't necessarily the same definition across the board).

I look to the QBI Safe Harbor as a guide to what the IRS is thinking. The IRS says if you meet the 250 hour test (among other things), you are "safe". In my opinion, the farther away you get from 250 hours, the less "safe" you are.

I don't know about you, but in my experience, one rental is usually FAR, FAR away from 250 hours, making it extremely unsafe.

If I remember correctly, the often cited case that ruled that one rental was a 'business' involved a situation where the owner did A LOT of ongoing work on the rental. But it has been a while since I looked into it.

As a side note ... many rentals often show a loss, in which case QBI is not a good thing.

[Kram BergGold]

My two cents. I know of no audits or IRS clarifications on this issue and my understanding is no one knows the answer. Given this I would take it.

[Rapid Robert]

"I know of no audits or IRS clarifications on this issue and my understanding is no one knows the answer."

Thank you for answering my question. Given the temporary nature of TCJA, the typical amount of dollar tax savings for a single rental unit under QBI, and the likelihood it would eventually end up in court, I think the IRS is not bothering with this for now.

That is not to say that I am advocating for taking a position just because it is likely you can "get away with it".

Since we're not exactly overflowing with traffic in this forum these days, I'll summarize where I think it stands, using a link to a substantial authority analysis, and then an excerpt from Spidell (California tax research publisher and CE provider) that I think is spot on. Even though this is "old news", I think it's still relevant, and heck, if someone changes their mind, there is still time to amend a few years!

And a quick comment on the safe harbor: in my scenario (and many similar ones, I'm supposing), the taxpayer does not qualify for the 250 hour safe harbor (that's over six weeks of full time work!), and so I would not use that.

First, the link. This is from David Fogel, EA, CPA, USTCP, and former long time IRS employee. He breaks down the actual text of the law, brings in relevant court cases, and in the end concludes (among other scenarios) that the single-rental landlord with active participation does indeed qualify, even under the Sec 162 definition.

https://fogelcpa.com/tax-articles

(it's the fifth item in the list, a PDF download)

Here is an excerpt from Spidell's annual tax update for tax year 2018 (first year of TCJA).

Noting that “neither the statutory text of section 199A nor the legislative history provides a
definition of trade or business for purposes of section 199A,” the IRS concluded that “section 162 is
the most appropriate definition of trade or business for purposes of section 199A.” (Prop. Treas.
Regs. ?1.199A-1(b)(13)) The title of IRC ?162 is Trade or Business Expenses.

This directly contradicts language in the Code which states that “qualified items of income, gain,
deduction and loss means items … such items that are effectively connected with the conduct of a
trade or business within the United States (within the meaning of section 864(c), Effectively
Connected Income, etc.”) (IRC ?199A(c)(3)(A))

Controversy

Commentators have disagreed regarding the circumstances under which income from rental real
estate qualifies as QBI. Opinions have ranged from real estate professionals only to an active
participation requirement to any and all rental real estate including triple net leases.

Clues to Congressional intent

It appears Congress intended the deduction to be allowed liberally with respect to rental real estate.

Depreciable assets: Congress, at the last minute, added the 2.5% of unadjusted basis limitation
to the wages limitation after realizing that operators of rental real estate don’t often pay wages.

REITs and PTPs: Owners of REITs and PTPs are, by definition, passive and they deal with real
estate rentals. So, why would Congress allow rental real estate to be included in QBI if held in a
REIT but not included if held by the individual taxpayer?

Proposed regulations did not take a stand

The single most disappointing aspect of the proposed regulations is that they did not take a stand
on rental real estate. However, the IRS issued Notice 2019-07 on January 18, 2019, that created a new
250-hour safe-harbor for rental real estate.

[Rapid Robert]

And I don't want to leave out our host, TheTaxBook. Their take is much more generic, which is not a complaint -- I wouldn't expect a desktop quick reference to contain as many editorial comments as an annual tax update CE course with a 36-page chapter on Sec. 199A.

In general, income from rental real property held for investment purposes and reported on Schedule E (Form 1040) is not eligible for the QBID. However, an investor may be eligible for the QBID if the rental activity is operated as a real estate business.

If an enterprise fails to satisfy these [safe harbor] requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of IRC section 199A if the enterprise otherwise meets the definition of a trade or business.

[Snaggletooth]

Should not the tenant status determine much of this determination? If there is only one rental, but if the tenant is a BUSINESS, I would say s.199A qualifies.

[Rapid Robert]

"If there is only one rental, but if the tenant is a BUSINESS, I would say s.199A qualifies."

I don't understand why the activity of the tenant matters. My question was about residential, but OK, let's suppose the tenant is commercial. It could be a triple-net lease, which seems much less likely to meet the qualifications. I confess I only have a superficial understanding of triple-net lease, starting with how can it possibly be considered FMV rental, when the amount of rent has nothing to do with rents charged for similar properties that aren't triple net leases. It seems the whole point of triple net lease is simply to exactly offset cash flow.

[EvenKeelTax]

It seems to me the number of rental properties and/or units doesn't matter. What matters is the client is writing down/keeping track of his or her hours with a log book/spreadsheet/calendar and if that number reaches 250 hours for the year there you go. I know in reality that doesn't happen often, but that's what the IRS wants.