Vacation rentals or other short-term rentals are generally not considered a business or business activity, and thus, any activity codified as such will not be included in Section 199A calculations for the Qualified Business Income Deduction (QBID). The IRS has simplified the requirements to corroborate time spent by employees and independent contractors, allowing taxpayers to consider the amount of time the employee or contractor generally spends on rental services, rather than requiring detailed time records, as long as the taxpayer keeps the employee or contractor's time, salary, or pay records. At CLA, we can help you determine if you are eligible for the safe harbor and, if not, consider planning steps to qualify for the safe harbor. Even if the safe harbor is not available, we can evaluate if there is any way that your rental activities qualify as a business without the safe harbor based on factors established by the IRS and the courts.
We can also analyze if any changes to your leases could improve your tax situation. Our experience in interviewing property managers, reviewing property management agreements, and reviewing lease agreements can help you make the necessary decisions to file your tax returns. QBI in real estate can be confusing and investors may want to consult a licensed professional to understand the rules and requirements. However, in many cases, rental income qualifies as business income, provided that IRS rules are followed.
At first glance, keeping an accurate record of income, expenses, and required record keeping can seem like a lot of work. But the possibility of saving 20% on taxable income with the QBI deduction can be a powerful incentive. The growth of the sharing economy has catapulted vacation rental sites such as Airbnb, HomeAway, VRBO etc., making it easier for vacation home owners to rent out their properties. To qualify for the QBI Safe Harbor, you must meet some rigorous requirements including requiring vacation rental owners to spend at least 250 hours during the calendar year providing rental services.
Tasks that are not considered rental services include traveling to and from a rental property, restoring the property, and reviewing financial statements and operating reports. Abby maintains contemporary time records to demonstrate the amount of time spent on rentals and treats the two commercial rentals as a single rental company. The interest may be in a property such as a single-family rental home or a small multifamily property or in a group of properties. Unfortunately, as the summer rental season ends many vacation home owners are realizing that the tax savings they are going to see may not be as good as they first expected.
This is because many rental real estate investment activities are considered passive which implies that renting real estate is not a business. But it's not clear when a rental activity rises to the level of a business or business allowing rental income to be eligible for the 20 percent deduction or loss of rent to reduce the deduction. The remaining rent would only involve 150 hours of rental services and therefore would not meet the 250 hour requirement for the safe harbor. If you qualify for the safe harbor you can be sure that your rental activities will qualify as a business and that rental income will be eligible for the 20% deduction (subject to possible limitations).
Clifton-Larson/Allen Wealth Advisors LLC Disclaimers LLC Transparency in Coverage of Machine-Readable Files.