The 2017 Tax Cuts and Jobs Act (TCJA) created a new deduction known as the Qualified Business Income Deduction (QBID). It is also called the pass-through deduction or Section 199A deduction. The QBID allows small  business owners to deduct up to 20% of qualified business income from federal income tax. Rental property owners will interested in the safe harbor rule of the section 199A qualified business income deduction (QBID) for their rental property.

Taxpayers that have income (or loss) from rental property will not be eligible for the QBID when they hold the property for investment purposes. However, a taxpayer that holds rental property as a real estate business and can meet the standard of an active real estate business under the new Section 199A regulations will also include their rental income (or loss) amounts reported on Schedule E, Line 26 as qualified business income.

Generally, individuals and entities that own rental real estate directly or through disregarded entities (entities that are not considered separate from their owners for income tax purposes, such as single-member LLCs) can claim the deduction if:

This safe harbor is available for taxpayers who seek to claim the section 199A deduction with respect to a “rental real estate enterprise.” Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant passthrough entity (RPE) relying on this revenue procedure must hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member.

The following requirements must be met by taxpayers or RPEs to qualify for this safe harbor:

• Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
• For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
• The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
• The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.
• The 250 hours of services may be performed by owners, employees or contractors. Time spent on maintenance, repairs, rent collection, expense payment, provision of services to tenants and rental efforts counts toward the 250 hours. Investment-related activities, such as arranging financing, procuring property and reviewing financial statements, do not.

Be aware that rental real estate used by a taxpayer as a residence for any part of the year is not eligible for the safe harbor.

This safe harbor also is not available for property leased under a triple net lease that requires the tenant to pay all or some of the real estate taxes, maintenance and building insurance and fees, or for property used by the taxpayer as a residence for any part of the year.