The Qualified Business Income (QBI) deduction, introduced under the Tax Cuts and Jobs Act of 2017, allows eligible taxpayers to deduct up to 20% of their qualified business income. This provision has opened up discussions among real estate investors and landlords regarding the eligibility of rental income for this deduction. In this article, we will explore whether you can claim the QBI deduction on rental property, the criteria that must be met, and the nuances involved in determining eligibility.
The QBI deduction is designed to benefit self-employed individuals and owners of pass-through entities such as sole proprietorships, partnerships, and S corporations. The deduction is applicable to income generated from a qualified trade or business, which is defined by the IRS under Section 199A of the Internal Revenue Code.
One of the central questions regarding the QBI deduction is whether income derived from rental properties qualifies as qualified business income. The IRS does not provide a definitive answer, leading to varying interpretations and opinions among tax professionals. Here are some important considerations:
To claim the QBI deduction on rental income, the rental activity must be classified as a trade or business. The IRS has provided some guidance indicating that rental activities may qualify if they meet certain criteria:
The IRS established a safe harbor provision to help taxpayers determine if their rental activities qualify as a trade or business. Under this provision, a rental real estate enterprise can qualify for the QBI deduction if the following criteria are met:
It's essential to consider the passive activity loss rules when determining eligibility for the QBI deduction. Generally, rental real estate activities are considered passive unless the taxpayer qualifies as a real estate professional. To qualify as a real estate professional, a taxpayer must:
If a taxpayer qualifies as a real estate professional, they may treat their rental activities as non-passive, making them eligible for the QBI deduction.
If you determine that your rental activity qualifies for the QBI deduction, the next step is calculating the deduction itself. Here’s how:
Qualified business income generally includes all income from the rental activity, minus any associated expenses, such as:
Once you have calculated your qualified business income, you can apply the 20% deduction. For example, if your qualified business income from rental activities is $50,000, your QBI deduction would be:
QBI Deduction = Qualified Business Income × 20% = $50,000 × 0.20 = $10,000
While the QBI deduction can be beneficial, there are some limitations and considerations to keep in mind:
For high-income earners (over $329,800 for married filing jointly in 2025), the deduction may be subject to limitations based on W-2 wages paid and the unadjusted basis of qualified property.
Taxpayers should be aware that other deductions, such as depreciation, may impact the calculation of qualified business income.
State tax treatment of the QBI deduction may differ from federal rules, so it’s important to consider state-specific regulations.
By understanding the requirements and implications of the QBI deduction for rental properties, real estate investors can make informed decisions to optimize their tax strategies.