QBI Loss

This is a difficult question to answer because many rules are involved. Did you ever make the safe harbor election for rental real estate? if you did did you ever treat both properties as one rental activity? if you did you must continue to treat both properties as one for QBI. the easiest way to meet the 250-hour requirement. if not each property would have to satisfy the 250-hour requirement under the safe harbor rules.

if you did not elect, then at some point you might have to justify to the iRS 1) why one property qualifies for QBI - the one with income but the other with the loss does not. 2) whether the rental activities are a trade or business which is required to take the QBI deduction. The safe harbor election provided means for landlords, who are not real estate professionals, to qualify their rental activities for QBI.  My opinion is that it would be inconsistent to treat one as qualifying but the other as not.

with both as QBI the loss of one offsets the income from the other. if you have a net loss for QBI that carries over to be used against future QBI income

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more on the safe harbor

If a taxpayer’s rental real estate activity meets the safe harbor, then it will be treated as a trade or business for purposes of 199A (QBI). The IRS cannot challenge the deduction. 

The safe harbor sets out requirements that must be met, and includes several exclusions and caveats

The Safe Harbor – Specific Requirements

1. Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise (“RREE”).
2. At least 250 hours of rental services must be performed each year with respect to each RREE.
3. The taxpayer must maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services.  Such records must be made available for inspection at the request of the IRS.

Books-and-Records Requirement.

The safe harbor also contains rules that permit a taxpayer to aggregate separate properties and treat them as a single RREE .

250-Hour Requirement.

Each RREE must satisfy the 250-hour requirement. Specifically, rental services include:

• advertising to rent or lease the real estate;
• negotiating and executing leases;
• verifying information contained in prospective tenant applications;
• collection of rent;
• daily operation, maintenance, and repair of the property, including the purchase of materials and supplies;
• management of the real estate; and
• supervision of employees and independent contractors.

Moreover, rental services can be performed by owners, employees, agents, and/or independent contractors of the owners. Accordingly, it will become very important that vendors who perform services that could be counted towards the 250-hour requirement provide documentation.

The above list does not purport to be exhaustive. Specifically excluded are the following activities:  financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; improving property under §1.263(a)-3(d); and hours spent traveling to and from the real estate.

The 250-hour requirement is an annual requirement, but the safe harbor relaxes this once an RREE has been in existence for at least four years.  At that point, the 250-hour requirement need only be satisfied in any three of the five consecutive years ending with the taxable year.

Contemporaneous Documentation Requirement

The safe harbor contains specific language that a taxpayer may provide a description of the rental services performed by such employee or independent contractor, the amount of time such employee or independent contractor generally spends performing such services for the enterprise, and time, wage, or payment records for such employee or independent contractor.

Tax Return Statement

The safe harbor cannot be utilized unless the taxpayer attaches a statement to its tax return. 

If a taxpayer has more than one RREE, the statement must list the required information separately for each RREE. The statement must include the following information:

• a description (including the address and category (commercial, residential, mixed-use)) of all rental real estate properties that are included in each RREE;
• a description (including the address and rental category) of rental real estate properties acquired and disposed of during the taxable year; and
• a representation that the requirements of the safe harbor have been satisfied.

Aggregating Separate Properties

As noted, the safe harbor contains a grouping rule that can both help and hurt taxpayers.  This would help taxpayers in cases where the 250-hour requirement cannot be satisfied for an individual property but can be satisfied on an aggregate basis.

Generally, a taxpayer may only aggregate “similar” properties.  For these purposes, commercial and residential properties are not treated as similar

Once a taxpayer treats interests in commercial properties or residential properties as a single RREE under the safe harbor, the taxpayer must continue to treat interests in all similar properties, including newly acquired properties, as a single RREE to the extent that the taxpayer continues to rely on the safe harbor.

However, a taxpayer that chooses to treat its interest in each residential or commercial property as a separate RREE may choose to treat its interests in all similar commercial or all similar residential properties as a single RREE in a future year.