IRS Guidance on How 20% Deduction Applies to Rental Income & Exchanges


The IRS recently issued final regulations and three related pieces of guidance implementing the new qualified business income (QBI) deduction (section 199A deduction) created by the 2017 Tax Cuts and Jobs Act (TCJA).  According to the IRS, the new QBI deduction, allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20% of their qualified business income. Eligible taxpayers can also deduct up to 20% of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.  The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

The National Association of Realtors issued a release explaining (in plainer English, perhaps) the IRS guidance.  According to that release:

“If you generate rental property income, that income can also qualify for the new deduction, as long as you can show that your rental operation is part of a trade or business. The IRS has released proposed guidelines that include a bright-line test, or safe harbor, for showing that your rental income rises to the level of a trade or business. Under that safe harbor, you can claim the deduction if your rental activities—which include maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities—total at least 250 hours a year. If your activity totals less than that, you can still try to take the deduction, but you’ll have to be prepared to show the IRS that your activity is part of a trade or business.”

As always, talk with your tax professional so you don’t miss out on any of these new changes and perhaps more importantly, run afoul of the IRS!

Click here to read the IRS release and documents.

Click here to read the full release at the National Association of Realtors.


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Director of Education & Outreach, National Real Estate Investors Association

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