QBI Deduction for Rental Property: Does Rental Income Qualify?

The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their qualified business income from their taxes, but navigating the eligibility rules can be incredibly complex. Many real estate investors find themselves asking, "Can rental activities qualify for QBI deduction?" or "Is my rental income considered a passive investment or a business?"

The answer lies in specific IRS criteria that distinguish a casual investment from a legitimate "trade or business." To confidently claim this deduction, you must understand the QBI deduction for rental property rules, including the rental real estate safe harbor and recent legislative updates. This guide will walk you through the requirements to determine if your rental income qualifies for the QBI deduction and how to secure your tax savings.

Key takeaways

• You may be able to deduct up to 20% of your net rental income if your activity qualifies as a "trade or business" under Section 199A.
• The IRS Notice 2019-07 provides a "safe harbor" for rental real estate enterprises that perform at least 250 hours of rental services annually and maintain separate books.
• Property used as a primary residence for more than 14 days (or 10% of rental days) and triple-net leases generally do not qualify for the QBI deduction.
• Contemporaneous records detailing hours, dates, and descriptions of services are mandatory to defend your deduction in an audit.

What is the QBI deduction for landlords?

The Qualified Business Income (QBI) deduction, created by the Tax Cuts and Jobs Act of 2017 under Section 199A, allows owners of pass-through entities to deduct up to 20% of their qualified business income. This deduction is available to sole proprietorships, partnerships, S corporations, and LLCs. However, for real estate investors, the critical question remains: does rental income qualify for QBI?

Unlike standard business operations, rental activities exist in a gray area between passive investment and active business. According to the IRS, QBI does not include capital gains, losses, or interest income that isn't properly allocable to a trade or business. This means your eligibility hinges entirely on whether your rental operations rise to the level of a Section 162 "trade or business" or meet the specific safe harbor requirements.

The core challenge is whether your rental activity is a trade or business.

The most common hurdle for investors is determining if their rental activity constitutes a "trade or business" under IRC Section 162. The IRS uses a "facts and circumstances" test to make this determination, looking for continuity, regularity, and a primary purpose of income or profit. If you simply own a property and collect rent with minimal involvement, the IRS may view this as a passive investment rather than a business, disqualifying you from the deduction.

IRC Section 162

To qualify under Section 162 without using the safe harbor, you must demonstrate considerable involvement in the property's management. Courts and the IRS consider factors such as the type of property, the number of properties rented, the day-to-day involvement of the owner or their agents, and the types of services provided. For instance, negotiating leases, handling repairs, and managing tenants regularly suggest a trade or business.

Conversely, a single property with a long-term tenant who handles their own maintenance might not meet this threshold. It is essential to track your operating expenses of rental property​ and management activities to support your claim. By documenting every interaction and expense, you build a stronger case that your rental activity is indeed a business operation.

QBI Safe Harbor for rental real estate enterprises

For many landlords, the ambiguity of the "facts and circumstances" test is risky. Fortunately, the IRS issued Notice 2019-07 to provide a "safe harbor" for rental real estate enterprises (RREE). If you meet all the requirements of this safe harbor, your rental activity will be treated as a trade or business for QBI purposes, eliminating the uncertainty.

Defining a rental real estate enterprise

A Rental Real Estate Enterprise (RREE) can consist of a single property or multiple properties grouped together. However, you cannot group commercial and residential properties into the same enterprise; they must be treated as separate enterprises. Once you choose to group properties, you generally must continue to do so in future tax years unless there is a significant change in circumstances.

Key safe harbor requirements

To use the safe harbor, you must satisfy three strict requirements annually. First, separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise. This is where using a dedicated platform like Baselane becomes invaluable, as it automatically separates your rental finances from personal funds.

Second, for tax years beginning before January 1, 2023, you must perform at least 250 hours of rental services each year. For later years, the rule relaxes slightly: you need 250 hours in three of the last five years if the enterprise has existed for more than four years. Finally, you must maintain contemporaneous records, including logs of hours, dates, and descriptions of services performed.

What counts as rental services?

Understanding what activities contribute to the 250-hour requirement is vital for ensuring your rental property qualifies for the QBI deduction. Eligible activities include:

•   Advertising to rent or lease the real estate.
•   Negotiating and executing leases.
•   Verifying information contained in tenant applications.
•   Collection of rent (including setting up methods on how to pay with echeck​).
•   Daily operation, maintenance, and repair of the property.
•   Management of the real estate.
•   Purchase of materials.
•   Supervision of employees and independent contractors.

What does not count?

Certain activities are explicitly excluded from the 250-hour calculation. You cannot count hours spent on financial or investment management tasks, such as arranging financing, procuring property, strictly reviewing financial statements or reports on operations, or planning long-term capital improvements. Additionally, travel time to and from the property does not count toward the 250-hour threshold.

Maintaining a rental property expenses spreadsheet and a detailed time log is essential to prove you met the requirement. Proper documentation protects you during an audit and ensures you don't miss out on the deduction due to a lack of proof. Accurately categorizing rental expenses further supports the legitimacy of your enterprise.

Rental scenarios: Does your income qualify?

To help clarify if your rental income qualifies as QBI, let's look at common scenarios investors face. These examples illustrate how different management styles and property types impact eligibility.

Single actively managed rental

You own one single-family home and manage it yourself. You handle all tenant screenings, repairs, and rent collection, logging 260 hours of work this year. Because you maintained separate books and met the 250-hour test, you can use the safe harbor. In this case, your rental income eligible for QBI deduction is secured.

Multiple rentals grouped as an RREE

You own three duplexes and spend 100 hours a year on each, totaling 300 hours. By grouping these properties into a single Rental Real Estate Enterprise, you meet the 250-hour aggregate requirement. You must file a statement with your tax return, electing to treat them as a single enterprise to claim the deduction.

Small commercial property

You own a small retail strip center. You don't meet the safe harbor's 250-hour requirement because you hire a property manager who handles most tasks. However, the property manager's hours count toward the activity level for the Section 162 test (though not for your personal safe harbor hours if you were trying to qualify that way). If the scope of activity is substantial enough, it may still qualify as a trade or business under the general "facts and circumstances" rule, making the rental income subject to QBI deduction.

Self-rental to your own business

If you own a building personally and rent it to a business you also own (where you own 50% or more), a special "related-party" rule applies. The rental activity is automatically deemed a trade or business for QBI purposes if the tenant business is an operating trade or business (and not a C-corporation). This powerful rule bypasses the 250-hour requirement. Using accounting software real estate management ensures the payments between your entities are tracked correctly.

Scenario 5 Short-term vacation rental

Short-term rentals (average stay of 7 days or less) typically do not qualify as "rental real estate" under the specific safe harbor discussed above, but they often qualify as a trade or business under Section 162 because of the high level of service provided. If you provide substantial services (such as cleaning, meals, or concierge services), the income might even be subject to self-employment tax. Understanding taxes on vacation rental income and tracking an Airbnb expenses list is crucial here. Proper bookkeeping for Airbnb is necessary to substantiate the active nature of the business.

When rental income does not qualify for QBI

Not every rental arrangement is eligible. The IRS has established clear exclusions that prevent passive rental income from qualifying for QBI in specific situations.

Personal use and residence exception

If you use a property for personal purposes for more than 14 days during the tax year, or more than 10% of the total days it is rented to others at a fair rental price (whichever is greater), it falls under IRC §280A restrictions. Such properties are explicitly excluded from the safe harbor and generally do not qualify for QBI.

Triple-net NNN leases

A triple-net lease, where the tenant pays for taxes, fees, and maintenance in addition to rent and utilities, is also excluded from the safe harbor. Because the landlord's involvement is minimal, the IRS views this as passive investment income. While you could theoretically argue it’s a trade or business under Section 162 facts and circumstances, it is a difficult hurdle to clear.

Pure investment activity

If you own land or a property strictly for appreciation and do minimal work, relying solely on a management company without significant oversight, your rental income count as qbi is unlikely. Passive investors who do not rise to the level of a trade or business cannot claim the deduction. Note that while you may not get QBI, you can still claim other benefits like the mortgage interest deduction and rental property.

Capital gains exclusions

It is important to remember that QBI deduction calculations for rental property do not include capital gains from selling the property. Even if you perform a 1031 exchange guide transaction, the gain realized is not operating income and therefore does not generate a QBI deduction.

QBI deduction limits and calculations

Calculating the deduction involves more than just taking 20% of your rent. You must first determine your Net Qualified Business Income (QBI), which is your rental income minus all deductible expenses. You must calculate depreciation on rental property and subtract it, along with interest and other costs, to find the net amount.

Income thresholds and wage limits

For 2024 and 2025, if your total taxable income exceeds certain thresholds (e.g., $191,950 for singles, $383,900 for joint filers in 2024, adjusted annually for inflation), the deduction may be limited. Above these limits, your deduction is capped at the greater of:

1.  50% of your share of W-2 wages paid by the business, OR
2.  25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

The UBIA is generally the original purchase price of the building (excluding land) plus improvements. This rule is beneficial for real estate investors who may not pay W-2 wages but have significant property assets.

The One Big Beautiful Bill Act updates

The "One Big Beautiful Bill Act (OBBBA)" made the QBI deduction permanent, meaning it no longer sunsets after 2025. Additionally, it introduced a minimum $400 QBI deduction (starting in 2026) for taxpayers with at least $1,000 of active QBI and material participation. This provides long-term certainty for investors planning their property management cash flow​.

Common QBI deduction mistakes & how to avoid them

Landlords often jeopardize their deductions by making avoidable errors. One major mistake is failing to keep separate books for each rental enterprise. Commingling funds makes it impossible to prove which expenses belong to which property, violating the safe harbor rules. Using a QuickBooks for landlords solution or a simpler QuickBooks alternative like Baselane can automate this separation.

Another error is ignoring the "contemporaneous" requirement for records. Creating a time log at the end of the year from memory will not stand up in an audit. You must document hours as they happen. Furthermore, do not confuse "passive activity loss" rules with QBI "trade or business" rules; they are separate sections of the tax code with different criteria.

Practical tips to maximize your qbi deduction

To ensure you receive the full benefit of the QBI deduction on rental income, proactive management is key. Start by reviewing your entity structure; while sole proprietorships qualify, formalizing as an LLC can provide legal protection and clarity for sole proprietorship taxes.

Ensure you capture every valid expense to lower your taxable income appropriately, but remember that QBI is based on net income. However, maximizing QBI isn't just about lowering expenses; it's about qualifying. Diligently track every repair, including rental property repair tax deduction items, to demonstrate active management.

Consulting a tax professional is highly recommended to navigate these rules. Utilize tools that help you with landlord tax deductions and strategies to reduce tax on rental income, ensuring your portfolio remains profitable and compliant.

Conclusion

Determining whether your rental income qualifies for QBI is a critical step in optimizing your tax strategy. While the potential for a 20% deduction is attractive, it requires strict adherence to IRS rules regarding "trade or business" status or the rental real estate safe harbor. By maintaining separate books, logging your 250 hours of services, and understanding the exclusions, you can confidently claim the QBI deduction rental property owners deserve.

Don't let disorganized finances cost you thousands in tax savings. Baselane offers an all-in-one banking and bookkeeping platform designed specifically for landlords, making it easy to segregate funds, track tenant deposit accounting, and generate the financial reports needed for tax season. Whether you need the best bookkeeping software for a sole proprietor or a robust accounting software for real estate​, Baselane helps you gain clarity and control over your portfolio. Take the stress out of accounting for rental properties and ensure your records are audit-ready today. Get started with Baselane today!