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Kelly Bullis: Rental activity safe harbor

Kelly J. Bullis

In the new Trump Tax Law, there is a wonderful option for folks with rentals to take advantage of. It’s called the “Qualified Business Income Deduction.” Basically, it is potentially up to a 20% deduction of net income on the business owner’s tax return. The law defines rentals to be a “qualified business.”

In order to be able to take the deduction on rental income, the owner must be able to document that they have accumulated at least 250 hours a year in taking care of their rental. Many folks have more than one rental, the good news is that the 250-hour rule is not increased by the number of rentals. Whether you have one rental or many, you only need to substantiate that you have at least 250 hours spent on taking care of rental related activity in that tax year.

There are limitations on the “Qualified Business Income Deduction” such as a 50% of wages paid, and or 25% of wages paid plus 2.5% of the depreciable assets of the “business.” Usually, in the case of rental activity, there are little or no wages paid, just depreciable assets.

The IRS has established a standard level of documentation that it says will be enough to substantiate the 250 hours. Basically, an owner must have a contemporaneous log to verify that they performed rental real estate services for the tax year. The hours that count toward this are … 1) hours spent by the owner; 2) hours spent by outside contractors (lawn maintenance, repairs, HVAC tuning, etc.). A “contemporaneous log” could be something as simple as a wall calendar with hours spent on each appropriate day. It can be a rounded number. (Example, you actually spent 45 minutes, it’s OK to write down “one hour.”)

If you use an outside property manager, then you should get a statement from them saying something like, “I certify that I can provide a contemporaneous log to verify that we performed rental real estate services of more than 250 hours for your real estate activity for the tax year. These services were performed by me, my employees, and various contracted workers during the year.”

Once you have established you meet the minimum 250 hours in a tax year, you can now use form 8995 which walks you through computing the allowable “Qualified Business Income Deduction.” (Us goofy tax pros like to lovingly call it the “QBID.”)

You should ask yourself, if you have at least one rental, does it make a taxable profit? If so, you should try to meet this 250-hour threshold. Example, if your rental had $10,000 in profit, would you like a potential $2,000 deduction on your tax return?

Did you hear? Ecc 7:12 says, “For the protection of wisdom is like the protection of money, and the advantage of knowledge is that wisdom preserves the life of him who has it.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.