I need some clarification and any supporting documentation would be so helpful!

I am told that the 20% does not apply to me because I am not considered a self rental.

I was told that if the income is subject to self employment tax it would be considered, and I would get the 20%.

I was told that rentals are completely passive, unless it involves self employment .

My tax preparer feels that in 4 years it will be a mess to all those that wrongly took the deduction

any thoughts, documentation would be so welcomed

Please help-thank you

(I manage all the properties)

I think your tax preparer is wrong. The first year I ever had rentals, I had only one. My husband was nervous about taxes so asked me to find a CPA. That very first year, with just one rental, I qualified as a Real Estate Professional. That designation takes the rentals out of passive investing, if I recall.

David I manage all the properties

See a thread that I started a few days ago titled "QBI 250 hours" and a few others. First, your tax preparer is completely wrong as to the definition of a qualified business. It has nothing to do with whether you are self-employed or not. I agree with the others here that you need to find a tax-preparer/CPA who has RE experience. If you preparer is telling you that THIS deduction is based on being self-employed, and that all definitions of passive and active are based on that, I am really concerned about what was left out in other parts of your taxes as well. You really may be getting ripped off. Not just in the QBI 20%, but also in the Schedule E.

There are lots of confusing things about this new deduction. In fact, the definition of a business or active participant or whatever seems to actually be different in for different parts of the tax code. IOW, the fact that you are an active participant for your Schedule E deductions is completely independent of the definition of a qualified business for this new 20% deduction.

There is a Safe Harbor described for this 20% deduction. Safe Harbor means that the bar has been set so high, that if you meet these qualifications, the IRS promises it will not question whether you can take the deduction or not. If you do NOT meet the Safe Harbor qualifications, you MAY still qualify for the deduction, but the IRS reserves the right challenge you in an audit. On the FAQ page, it specifically says:

"known as the section 199A deduction, that may be available to individuals, including many owners of sole proprietorships, partnerships and S corporations. Some trusts and estates may also be able to take the deduction. This deduction, created by the 2017 Tax Cuts and Jobs Act, allows non-corporate taxpayers to deduct up to 20 percent of their QBI". So clearly this is intended for individuals, and not just self-employeds, to take advantage of the deduction. So your tax preparer is all wet already. This deduction is specifically for landlords who directly own and manage their property (or have a "direct-like" arrangement, such as an S-Corp or LLC).

The only 3 rules are these:

1 - You must put in 250 hours of work per year on the entity. Not on each individual property, but on the entity. So, if you have a single company that owns the homes, or if you own them all directly, you must spend 250 hours in the year on them. If you were to own each through a different company, then it gets tricky, as you need to spend 250 on each entity. This is where you would need a lawyer/CPA to help you set up your properties in such a way as to be a single entity for these purposes. But if you spend 250 hours total - and this can be hours that you spend, your property manager spends, or that individuals who you hire spend repairing, maintaining, etc - then you meet the Safe Harbor limit.

2 - You cannot have the lease set up as what they call a triple-net lease. Apparently this is something where the tenant pays all the bills, pays the taxes and insurance, takes care of all the maintenance and repairs. This would take away the "Active" designation, because the tenant is doing all the work and it simply becomes a straight investment.

3 - You cannot have used the property as a residence for any portion of the year.

That's it. If you meet all of these, you meet the Safe Harbor, and the IRS will not challenge your designation as a Qualified Business. This year, they will not even ask for any documentation or proof that you spent the 250 hours you are claiming. In future years, you must have a contemporaneous record of your hours as backup documentation that you can show in the event of an audit. That means you must document as the year goes along - instead of just generating it all 3 days before the audit - so start documenting 2019 hours now!

Even if you do not meet the 250 hours, you may still have a business vs an investment - the IRS has not specified an exact line at which it will say it's a business vs an investment. That is where you will need to feel confident that you are actively involved in a rental business, and don't just rent it out and wait for the money to come in. This is likely what your tax preparer is referring to, and does not want to be held liable in case of an audit. But don't let that scare you. Keep track of your hours. keep track of any hours that somebody else (other than the tenant) works at the house.

My guess is that the closer to 250 hours you are, the better your chance to survive an audit, or Tax Court if you choose to appeal the audit ruling. Just remember that the IRS just says that it has to be a business vs an investment. As long as you feel like your oversight is a job - compared to just investing the money in a REIT and seeing where the market takes it - then you are trending toward a business.

I would like to add that the form for tracking the 250 hrs is simple to fill out--- go to the post about 250 hrs and i mentioned a company you can get a free form from.

Maybe Jeffery can put one on this site?

myob: So you're basically working 8 hours a day 7 days a week on your rentals??

I'm sorry, but that sounds horrible. :(

- John...

After reading all your wonderful comments I did some research myself… Well a lot of research and found publication 535 business expenses, qualified business income deduction from the IRS, 2018 form 1040 line 9 qualified business income deduction, facts about the qualified business income deduction IRS, executive summary from notice 2019-07 199A safe harbor for rental real estate. Lots of good info.

I ended up getting it!!!

Thank you so very much! Thank you for your comments!

I am starting my log of hours

John it does sound horrible-- just not to me.

I don't know when I'll have time to plan these 6 cruises I have coming up. Gonna be in HI and Vancouver for 19 days come May. Forgot I had Oasis OTS in Feb???

Anyway truth be known I go to the office every day I'm in town. Doing Tax prep for IRS-- new year and also property taxes for this year. My son shares our offices and for him to have time I usually work weekends so he can do six flags, Disney, great Wolfe adventure and vacations while we're in town. I go to the gym 2 hrs a day for workout and Racquetball and meet up with MMan daily.

I keep asking myself when are you going to stop Don? I feel like if I stop I'll die and wither.

Ok lets try this. do the 3W's first followed by bakertilly. com / sample log