Rental income may be eligible for the Qualified Business Income (QBI) deduction under section 199A, but only if the rental activity qualifies as a trade or business. According to the IRS, an activity qualifies as a trade or business if it is carried on with continuity and regularity and the primary purpose is for income or profit (section 162). The ownership and rental of real property may meet this standard if it is managed actively and not merely passive.
Eligibility Criteria for Rental Real Estate
- Safe Harbor for Rental Real Estate: Revenue Procedure 2019-38 provides a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of the QBI deduction. To qualify, the taxpayer must meet specific requirements, including spending at least 250 hours per year managing the property and maintaining records to substantiate the time spent.
- Non-Safe Harbor Rental Activities: If the rental real estate does not meet the safe harbor requirements, it may still qualify as a trade or business under section 162 if it is conducted with continuity and regularity and for profit.
- Commonly Controlled Business: Rental or licensing of property to a commonly controlled trade or business operated by an individual or pass-through entity is considered a trade or business under section 199A.
Exclusions and Limitations
- Rental income from corporations or services performed as an employee is never considered a qualified trade or business.
- Specified service trades or businesses (SSTBs) are generally excluded from QBI eligibility for taxpayers with taxable income above the threshold (e.g., $197,300 for single filers, $394,600 for married filing jointly in 2025), unless within the phase-in range.
Source:
Form 8995 Instructions
Form 8995-A Instructions
Disclaimer: Always verify eligibility and requirements with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.