Make Sure To Report Your Rental Income As A Qualified Business Income To Save In Taxes
If you own a rental property and have a good CPA, you should have reported your rental income in your 2018 tax return as a Qualified Business Income (QBI) for the purpose of Code Sec. 199A. If not, you should probably amend your 2018 tax return to enjoy the benefits of Code Sec. 199A and look for a better CPA!
Code Sec. 199A (AKA Trump’s 20% discount) is one of the most well-known changes to the tax law that was created by the Tax Cuts and Jobs Act (TCJA). In a nutshell, if your income is considered a “qualified business”, under certain rules you are allows to reduce your taxable income by 20%. That is to say, if your rental taxable income $500,000 and you meet all the 199A requirements, you get to reduce your rental taxable income by 20% (in this case $100,000). Assuming you are in the highest tax bracket for Federal tax (37%) and live in a high tax state such as California (12.3%), your total tax saving from Code Sec. 199A is about $50,000 (100,000 X (37+12.3%)).
To make things easy on taxpayers, the IRS recently issued a revenue procedure that provides a “safe harbor” for real estate owners, under which rental real estate is considered a QBI for the 199A purposes. This was a gray area in the TCJA and many CPA took the position that rental income is NOT QBI. With this new revenue procedure, taxpayers can treat their rental income as a QBI with a peace of mind.
To qualify for this safe harbor you must:
If you have any questions about Code Sec. 199A, Qualified Business Income, how it relates to your rental income and rental properties, and how you can reduce your taxable rental income, please contact us.
Code Sec. 199A (AKA Trump’s 20% discount) is one of the most well-known changes to the tax law that was created by the Tax Cuts and Jobs Act (TCJA). In a nutshell, if your income is considered a “qualified business”, under certain rules you are allows to reduce your taxable income by 20%. That is to say, if your rental taxable income $500,000 and you meet all the 199A requirements, you get to reduce your rental taxable income by 20% (in this case $100,000). Assuming you are in the highest tax bracket for Federal tax (37%) and live in a high tax state such as California (12.3%), your total tax saving from Code Sec. 199A is about $50,000 (100,000 X (37+12.3%)).
To make things easy on taxpayers, the IRS recently issued a revenue procedure that provides a “safe harbor” for real estate owners, under which rental real estate is considered a QBI for the 199A purposes. This was a gray area in the TCJA and many CPA took the position that rental income is NOT QBI. With this new revenue procedure, taxpayers can treat their rental income as a QBI with a peace of mind.
To qualify for this safe harbor you must:
- perform at least 250 hour of service throughout the year (about 5 hours a week on average),
- maintain record of the services that you have performed including time, date, description of the services performed, etc., and
- attach a statement to your tax return regarding the safe harbor. This statement must be attached every year to your tax return.
If you have any questions about Code Sec. 199A, Qualified Business Income, how it relates to your rental income and rental properties, and how you can reduce your taxable rental income, please contact us.