Solely for purposes of the QBID, your rental real estate enterprise will be treated as a trade or business under the safe harbor, if all of the following requirements are satisfied during the tax year.
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise,
- 250 or more hours of rental services are performed per year for the rental enterprise (for rental real estate enterprises in existence for at least four years, this requirement is met if 250 hours or more of rental services are performed in any three of the previous five consecutive years ending with the current tax year),
- A statement must be attached to the tax return for each year you wish to use the safe harbor, and
- You maintain contemporaneous records, including time reports, logs, or similar documents, regarding: — Hours of all services performed,
– Description of all services performed,
– Dates on which such services were performed, and
– Who performed the services.
Rental services. For purposes of the safe harbor, rental services include the following activities.
- Advertising to rent or lease the real estate,
- Negotiating and executing leases,
- Verifying information contained in prospective tenant applications,
- Collection of rent,
- Daily operation, maintenance, and repair of the property,
- Management of the real estate,
- Purchase of materials, and
- Supervision of employees and independent contractors.
Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners.
The term rental services does not include financial or investment management activities, such as arranging financing, procuring property, studying and reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements, or hours spent traveling to and from the real estate.
Example: Jill owns a condo that she rents out during 2021 and she does not use a management company. She receives rent deposits directly from the tenant during the year. In May, she made arrangements for repairs to be completed at the condo. She had no other contact with the tenant and did not visit the property during the year. In this scenario, Jill’s rental real estate enterprise probably does not rise to the level of a trade or business under the safe harbor because it is unlikely she spent 250 hours performing rental services. She would not be entitled to claim the QBID for her rental income under the safe harbor.
Excluded rental real estate arrangements. The safe harbor does not apply to the following rental real estate arrangements.
- Real estate used by you as a personal residence for any part of the year, including vacation homes.
- Real estate rented or leased under a triple net lease which requires the tenant to pay property taxes, insurance, and maintenance in addition to rent.
- Real estate rented to your trade or business conducted by the taxpayer (including a partnership or S corporation) which is commonly controlled.
- Any rental real estate enterprise treated as a specified service trade or business (SSTB).
SSTB. An SSTB includes the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial or brokerage services, or receiving income for endorsing products or services, using your image, likeness, name, signature, voice, trademark, or public appearances.
