There’s no doubt real estate is a lucrative investment! Ownership of income-generating properties has been the seat of many eventually towering fortunes.
But the liabilities involved with real estate are considerably larger than other investments. Managing tenants and maintenance, along with property and income taxes are expenses that perpetually eat away at your profit margin.
Good News For Real Estate Investors
But despite these expenses, there’s some good news for real estate investors on the income tax front. Recently unveiled IRS regulations, known as the Qualified Business Income Deduction (or just QBI), allow certain real estate investors – individuals and business or partnership entities, such as sole proprietorships, partnerships, S corporations, trusts, or estates – to treat rental real estate as a trade or business enterprise.
This new regulation, which officially took effect in the 2018 fiscal year, opens a tremendous avenue for real estate investors to claim significant deductions on rental revenue.
QBI DEDUCTION LIMITATIONS
Establishing Your Real Estate Investment As a Business Or Trade
While QBI deductions will be a boon to many real estate investors, the new regulations do have their limitations. First of all, the taxpayer must establish that their real estate investment activities qualify as a “business enterprise.” Meeting this requirement lands such investments in a “safe harbor” from which they qualify for the QBI deduction.
Typically speaking, purely passive investments, such as properties leased on Triple Net (NNN) lease agreements (in which each tenant pays a portion of site maintenance fees, insurance, and property taxes in addition to rent) do not qualify as a business enterprise.
However, if an investor spends a minimum of 250 hours servicing the investment property enterprise – which also requires maintaining separate accounting records and detailed service records – even NNN investment properties can be sheltered in the QBI qualifying “safe harbor.”
Annual Income Caps Limit QBI Qualification
The QBI deduction applies primarily to taxpayers with annual income below $315,000 for joint returns and $157,500 for Individual filers.
Taxpayers with higher annual income are still eligible for the deduction, under certain circumstances. Dependent factors include the type of trade or business, the amount of W-2 wages paid in connection with the enterprise, and the unadjusted basis after the initial purchase of a qualified property.
For more details and to take full advantage of QBI, it’s important to consult a qualified tax professional.