For owners of pass-through entities to claim the 20% qualified business income (QBI) deduction, they must be in a trade or business. When it comes to real estate activities, it’s sometimes difficult to determine whether they are a business or merely investments. The IRS has created a safe harbor that can be used show that certain rental real estate activities are a trade or business and amount to a rental real estate enterprise for which the QBI deduction may be claimed (Rev. Proc. 2019-38).
There are four conditions to be a rental real estate enterprise:
Note: If you fail to meet the safe harbor, you can still rely on case law and IRS rulings on Code Sec. 162 to show that your rental real estate activities amount to a trade or business.
The excess of the tax assessed by the IRS over the amount reported on your return.