Section 199A, otherwise known simply as the Qualified Business Deduction, was introduced in 2017 as a part of the Trump Administration’s Tax Cuts and Jobs Act (TCJA). The Qualified Business Deduction allows qualifying business owners, whether through sole proprietorships, partnerships, S-corps, trusts or estates, to deduct up to 20% of their business income within certain limits.
Fortunately for individuals who own rental properties in the shore communities and elsewhere, many rental properties are included under “Safe Harbor” provisions of the Qualified Business Deduction (QBD). For your rental property to qualify as a trade or business under the QBD, at least 250 hours of services need to be performed for the enterprise each tax year. Services include those performed by the owner, employees, and independent contractors ranging from repairs and maintenance, rent collection, paying related bills, and time spent advertising. Investing activities, such as obtaining financing, buying property, reviewing financial statements, or overseeing long-term capital improvements, that are performed by the owner do not count towards the 250-hour requirement. Owners should maintain contemporaneous records that include the hours, dates, descriptions, and names of individuals who performed qualifying services.
Owners should keep additional records that reflect the income and expenses associated with each rental real estate property. These records do not have to be kept in a financial software program like QuickBooks, they can also be recorded in programs like Excel, Google Sheets, or simply by paper & pencil. Tracking your income and expenses in a single place and in an organized manner makes tax preparation easier and helps provide a better picture of your rental’s financial performance. Expenses can be everything from utilities and repairs to locks and light bulbs. Of course, some expenditures may be capitalized and set up for depreciation over 27.5 years if residential property, or 39 if commercial property.
If your rental property enterprise meets the above requirements, you should be eligible to deduct up to 20% of the rental income from your AGI. The deduction is also subject to income limitations and various calculations that may limit the deduction to less than 20%. Nevertheless, to maximize the benefit of the Qualified Business Deduction, be sure to keep detailed financial records, and to log the time spent advertising, improving, and monitoring your rental property.