QBI for Real Estate LLCs: How LLCs Qualify for the 20% Deduction 2026

Real estate investors often find that taxes are their single largest expense, making every deduction crucial for portfolio growth. Fortunately, the Qualified Business Income (QBI) deduction has been a powerful tool for pass-through entities, and thanks to the One Big Beautiful Bill Act (OBBBA), this deduction is now permanent.

However, new rules starting in 2026 will change how eligibility is calculated, including new minimum deductions and updated income thresholds. For landlords asking, “Does an LLC qualify for QBI deduction?” the answer is often yes—provided specific trade or business standards are met.

This guide explains how the LLC QBI deduction works for real estate investors in 2026 and beyond, so you can plan your tax strategy with confidence.

Key takeaways

• The One Big Beautiful Bill Act (OBBBA) has made the QBI deduction permanent.
• Starting in 2026, phase-in ranges increase to $150,000 for joint filers and $75,000 for other taxpayers.
• A new 2026 rule allows a $400 minimum deduction if an active qualified trade or business generates at least $1,000 in QBI.
• Many rental enterprises must meet IRS Safe Harbor requirements, including 250 hours of service and separate books.
• Proper LLC structuring and aggregation can help maximize deductions for high-income earners subject to wage and property basis limits.

What is the Qualified Business Income deduction

The Qualified Business Income (QBI) deduction, established under Section 199A, allows eligible owners of pass-through entities—including LLCs, partnerships, S corporations, and sole proprietorships—to deduct up to 20% of qualified business income from taxable income.

This deduction is taken below the line, meaning it reduces taxable income but does not reduce adjusted gross income (AGI).

For real estate investors, the LLC QBI deduction can significantly lower the effective tax rate on rental income. QBI generally includes the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business, while excluding capital gains, dividends, most interest income, W-2 wages paid to S-corp shareholders, and guaranteed payments to partners.

Holding property in an LLC does not automatically qualify the income for QBI. The rental activity itself must rise to the level of a trade or business under IRS Section 162 or meet a specific IRS safe harbor.

When does a real estate LLC qualify as a trade or business?

For purposes of the QBI deduction, rental activity must be treated as a qualified trade or business. While rental income is often considered passive for other tax rules, that classification does not automatically disqualify it from QBI.

To provide clarity, the IRS issued a rental real estate safe harbor under Revenue Procedure 2019-38. A Rental Real Estate Enterprise (RREE) that meets these requirements is automatically treated as a trade or business for QBI purposes.

IRS Safe Harbor requirements

To qualify under the safe harbor, the rental enterprise must:

• Maintain separate books and records for the rental activity by using online business bank accounts for LLCs‍
• Perform 250 or more hours of qualifying rental services per year
• Keep contemporaneous records showing hours, dates, and descriptions of services performed

Qualifying rental services may include advertising, tenant screening, lease negotiations, rent collection, property management, and supervision of repairs. Investor-level activities—such as arranging financing or reviewing financial statements—do not count toward the 250-hour requirement. Certain properties are excluded from the safe harbor, including triple-net leases and properties used as a personal residence for more than 14 days per year.

Eligibility checklist: How to qualify your LLC for QBI

If you are asking “Does an LLC qualify for QBI?”, the following checklist helps determine eligibility:

• Entity structure: Is the business a pass-through entity (LLC, partnership, S-corp, or sole proprietorship)?
• Income type: Is income derived from rental operations rather than capital gains, dividends, or interest?
• Safe harbor compliance:
  
  • Separate books and records are maintained
  • 250+ hours of qualifying rental services
  • Contemporaneous service logs
• Excluded properties: Not a triple-net lease or heavily used as a personal residence
• Taxable income: Below or within the applicable phase-in thresholds

Accurate bookkeeping is essential to meeting these requirements. Tracking tools like a Rental Property Expenses Spreadsheet and landlord-specific bookkeeping platforms can help ensure property expenses and income are categorized for QBI purposes.

If you’re managing short-term rentals, tracking Airbnb operating expenses is equally critical to determine your net QBI.

How to calculate QBI for LLC (2026 rules)

The basic QBI deduction is the lesser of:

• 20% of qualified business income, or
• 20% of taxable income (minus net capital gains)

Beginning in 2026, the OBBBA introduces two important changes:

• Minimum deduction: Taxpayers with at least $1,000 of QBI from an active qualified trade or business may claim a minimum QBI deduction of $400
• Higher phase-in thresholds:
  
  • $150,000 for joint filers
  • $75,000 for all other filers

Taxpayers below these thresholds generally qualify for the full 20% deduction, assuming the rental activity qualifies as a trade or business. If you’re hovering near these thresholds, reducing taxable income becomes a strategic priority. You might consider looking into deductible expenses, such as a landlord’s home office tax deduction.

W-2 wages and UBIA limitations for high-income earners

Once taxable income exceeds the upper threshold, the QBI deduction for LLC owners becomes subject to limitations. The deduction is capped at the greater of:

• 50% of W-2 wages paid by the business, or
• 25% of W-2 wages plus 2.5% of the Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property

This rule is especially important for rental LLCs that do not pay W-2 wages. In these cases, the UBIA calculation allows owners to use the building's original cost basis (excluding land) to determine the deduction limit.

For example, if you own a rental property with a building value (UBIA) of $1 million and pay no wages, your limitation would be 2.5% of $1 million, which is $25,000. If 20% of your QBI is less than $25,000, you get the full 20%; if it is more, you are capped at $25,000.

To maximize this, accurately track your asset basis and correctly claim every valid rental property repair tax deduction vs. capitalization. Additionally, deductible mortgage interest on rental property reduces your QBI, which requires careful balancing.

Aggregation rules for LLCs with multiple properties

The IRS allows you to aggregate multiple properties into a single Rental Real Estate Enterprise (RREE) for QBI deduction. This is helpful if one property has high QBI but low UBIA, while another has high UBIA (a newer purchase) but lower income.

By aggregating, you combine the W-2 wages and UBIA of all properties to calculate a higher limitation threshold. This strategy also helps meet the 250-hour safe harbor requirement, as you can count hours spent across the aggregated enterprise rather than per property.

However, you cannot aggregate residential and commercial properties in the same group, nor can you include properties used as a personal residence.

Common misconceptions about QBI for real estate LLCs

Several misunderstandings frequently cause investors to misapply the QBI rules. Here’s the real truth:

• Capital gains, dividends, and most interest income do not qualify as QBI
• Triple-net leases do not qualify for the safe harbor
• Personal use can disqualify a property under vacation home tax rules
• Entity type does not determine eligibility. The deduction flows to the owner, regardless of whether the activity is held in an LLC or operated as a sole proprietorship

Also read: Sole proprietorship vs LLC for vacation rental property

QBI reporting requirements for LLC owners

LLC owners must report QBI correctly on their individual tax returns:

• Use Form 8995 (Qualified Business Income Deduction Simplified Computation) when taxable income is below the threshold
• Use Form 8995-A is required for higher-income taxpayers or those aggregating properties

Multi-member LLCs must provide Schedule K-1s that separately state QBI, W-2 wages, and UBIA amounts for each member. Errors in allocation can result in denied deductions or audits.

Also, be aware of "interest income from LLC qualified business income" reporting. Interest incidental to the business (like interest on accounts receivable) might be included, but generally, bank interest is investment income and excluded.

Maintain clear records to maximize your QBI deduction

To fully leverage the LLC QBI deduction, meticulous record-keeping is non-negotiable. The IRS requires you to prove your "trade or business" status, which means your financial data must be spotless.

With Baselane’s integrated banking and bookkeeping, you can keep funds separated per property and automatically categorize transactions, making it easier to separate personal and business expenses—a key requirement for the safe harbor. With our no minimum deposit checking account, you don't pay fees on idle cash while maintaining the necessary "separate books."

Take control of your portfolio's financial health and maximize your potential savings today. Sign up for Baselane today!