Do you want to know if real estate management qualifies for QBI? That’s a good question and one that affects tens of thousands of taxpayers for the 2018 filing year.
Included in the Tax Cuts and Jobs Creation Act of 2017 is a deduction for up to 20% of income generated
from a qualified business. This is also known as the Qualified Business Income (QBI) deduction or Section 199A deduction.
Does my real estate management qualify for the new 20% deduction? Based on my experience, I’ll help you get to the answer as you read further.
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Now, let’s get started.
What Exactly Does The QBI Deduction Entail
The Qualified Business Income Deduction was established by the Tax Cuts and Jobs Act of 2017, sometimes known as the TCJA.
Because so many different kinds of investments are categorized as “passive,” the real estate industry first experienced a great deal of consternation and uncertainty.
As a result, the deduction gave the impression of implying that rental real estate did not meet the requirements to be considered a “business” under the new legislation.
The passive nature of the activity, on the other hand, only applies to the individual taxpayer and not to the rental real estate business itself.
Therefore, for instance, even if an individual investor has very little or no interaction with a renter, the pass-through firm could still be active because of operations such as tenant screening and leasing, repairs and maintenance, and property management.
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Can I Get The QBI Deduction On Real Estate Management Income
The IRS issued Notice 2019-07, the main aspects of which are summarized here, to offer preliminary guidance on this often-asked question:
For the QBI deduction, rental income from certain particular categories of properties is expressly excluded:
- Rental operations deemed to be passive but not part of a trade or business
For instance, a single-family home that has been rented out for a year or more and has seen little to no interaction between the landlord and the tenants except for the periodic collection of rent and the sporadic maintenance
- Real estate that qualifies as a dwelling under IRC 280A for any portion of the tax year.
This covers getaway properties, log cabins, temporary or “snowbird” dwellings, etc.
Leases that are Triple-Net (NNN), where the Lessee additionally pays for Real Estate Taxes, Insurance, and Maintenance
- Rental properties outside of the US
- Land leases
You cannot deduct QBI from the revenue earned if your rental or rental-related operations fall under one of the headings mentioned above.
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How Exactly Does The Deduction For QBI Work
The qualified business income deduction enables those who are eligible to deduct up to 20 per cent of their qualifying business income from their taxable income.
This includes people who are self-employed and owners of small businesses.
In general, the total taxable income of the filer for the year 2021 must be less than the threshold of either $164,900 for single filers or $329,800 for joint filers.
These values are projected to increase to $170,050 for single taxpayers and $340,100 for joint filers in the year 2022.
When taxpayers have exceeded that threshold, the IRS applies a set of complicated standards to assess whether or not the business’s revenue is eligible for deductions.
The qualified business income deduction is available to taxpayers who have “pass-through income,” which is defined as revenue from a business that is reported on the taxpayer’s tax return.
The qualified business income deduction (QBI) can be claimed by any kind of business organization, including sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs).
How Do I Figure Out The QBI Real Estate Management Deduction
As a general rule, the section 199a deduction, which is also known as the eligible business income deduction, is equal to the smaller of the following amounts:
1. Twenty per cent of income from eligible business activities
2. twenty percent of the taxable income, less the net capital gain
Earnings from a “pass-through” real estate company organization that are not subject to taxation at the corporation level are required to qualify as legitimate business income.
According to the debate, it is important to note that this deduction is also subject to income restrictions.
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How Does The QBI Deduction Work For Rental Real Estate
To further understand how this operates, let’s look at a straightforward illustration.
Let’s imagine you worked an extra 40 hours over the year and earned an additional $2,000, of which half came in the form of dividends that qualified from your investment in Arrived properties and the other half came from your regular employment.
Also, for this illustration, let’s say that you fall into the tax rate of 24 percent.
Your standard income from the work will now be subject to taxation at your income tax rate of 24%, which means that you will be responsible for paying $240 in taxes on the $1,000 that you have earned. (24% of 1,000 = 240).
Taxes taken out of earnings from a job equal $240.
Now, let’s take a look at that one thousand dollars in dividends.
Since Arrived properties are structured as REITs, which makes them eligible for the QBI, you are instantly eligible for a tax-free deduction of 20% of the purchase price.
This results in you having a remaining taxable income of $800, and your tax liability for this amount will be 24%, which is equal to $192.
$192 was deducted as tax from earnings from Arrived.
This effectively implies that the amount of tax that you pay on your Arrived income is 19.2%, but the amount of tax that you pay on money obtained from work is 24%.
And it is precisely for this reason that QBI is such an attractive investment opportunity for real estate investors.
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Final Thought
Now that we have established that real estate management is qualified for QBI, you cannot take advantage of the reduced entry barrier when investing in rental property through Arrived.
But you can also take advantage of the 20% QBI tax benefit that is offered to investors.
As the IRS continues to offer guidelines on the new 20 percent deduction, it is advisable to identify as soon as possible if your rental real estate is qualified for the QBI deduction.
Doing so sooner rather than later is the best course of action to take.
You could find a new and major tax-saving option that will allow you to minimize the amount of money you owe in taxes in 2019 if you are willing to put in a little bit of effort right now.