QBI Safe Harbor and QBI deduction are different for rental property?

Forum|Forum|3 years ago
March 15, 2023
1 reply
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I am confused about the QBI questions TurboTax asked for the rental property income.

It asked me if my rental property income was qualified for QBI Safe Harbor, then asked me if it was qualified for QBI deduction.

QBI Safe Harbor and QBI deduction are TWO different things??

Best answer by PatriciaV

The blue link on the QBI page has a long discussion of what is a trade or business (More Info about what's considered...).

Here is the most relevant paragraph:

"There is considerable uncertainty about whether a small-scale, long-term rental of a single property or small number of properties is a "trade or business." This applies to the relatively common situation where a taxpayer owns a single rental home or two, and has relatively stable tenants that generally stay for a year at a time or more. Numerous court cases exist where situations meeting this description have been considered a "trade or business," and others where similar situations have not been considered a "trade or business."

Basically, it's up to the taxpayer to decide if the 20% deduction is worth the risk that the activity is NOT a trade or business in the eyes of the IRS. TurboTax cannot make that decision for the taxpayer.

PatriciaV

Employee

The QBI safe harbor is a way to prove to the IRS that your rental property is not an investment but a business, the income from which becomes QBI (qualified business income). If you meet the conditions, the IRS has confidence that your rental is a business. This is because the conditions for the safe harbor more clearly define your rental as a business. If you meet the conditions, you lower your audit risk. That's the safe part of the safe harbor.

You can also qualify for Qualified Business Income with other criteria without taking the safe harbor. If you answer "no" to QBI Safe Harbor, TurboTax will ask if you'd like to qualify as a business next. That qualification is easier to get but more open to audits by the IRS; you lose the safe part of the safe harbor.

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M

manbeingAuthor

Employee

@PatriciaV Question to your second paragraph above, for most of part-time landlords, if they don't meet the safe harbor criteria, it will be very difficult for them to be qualified to use QBI deduction, but the turbotax just says 'In general, if rental activity is based in the U.S. and carried on with regularity, continuity, and a profit motive, then income from this activity is considered Qualified Business Income (QBI)' .This statement is misleading as it lets most of users think the QBI criteria is so simple resulting in selecting 'Yes, this income is QBI'. Agree?

PatriciaVAnswer

Employee

The blue link on the QBI page has a long discussion of what is a trade or business (More Info about what's considered...).

Here is the most relevant paragraph:

"There is considerable uncertainty about whether a small-scale, long-term rental of a single property or small number of properties is a "trade or business." This applies to the relatively common situation where a taxpayer owns a single rental home or two, and has relatively stable tenants that generally stay for a year at a time or more. Numerous court cases exist where situations meeting this description have been considered a "trade or business," and others where similar situations have not been considered a "trade or business."

Basically, it's up to the taxpayer to decide if the 20% deduction is worth the risk that the activity is NOT a trade or business in the eyes of the IRS. TurboTax cannot make that decision for the taxpayer.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"