QBI from Sch E

[SaraEA]

To add to the confusion, this from the recently released draft of Pub 535, pg 2.  The draft is dated Jan 7.  Emphasis added. 

https://www.irs.gov/pub/irs-dft/p535--dft.pdf

I

In general, to be engaged in a trade or busi-

ness, you must be involved in the activity with

continuity and regularity and your primary pur-

pose for engaging in the activity must be for in-

come or profit. If you own an interest in a

pass-through entity, the trade or business de-

termination is made at that entity's level.

The ownership and rental of real property

doesn’t, as a matter of law, constitute a trade or

business, and the issue is ultimately one of fact

in which the scope of your activities in connec-

tion with the property must be so extensive as

to give rise to the stature of a trade or business.

However, the rental or licensing of property to a

commonly controlled trade or business is con-

sidered a trade or business under section 199A.

 

 

 

 

[joanmcq]

I’m sorry, but if an ownership interest in a PTP or REIT qualifies when these are, for most people, nothing more than investments, my rentals, from which I derive about half my income, is a trade or business

[Randall]

I'm still confused.  Who owns and rents property without a profit motive?  It seems like it would be a trade or business even if it is not your primary job.  Most of my clients with rentals have losses anyway.  But I have one client who owns about 20 properties with no mortgage interest and has a nice profit.  It is not his primary business but I'm thinking it would qualify.

 

[EricF]

6 hours ago, Randall said:

I'm still confused.  Who owns and rents property without a profit motive?  It seems like it would be a trade or business even if it is not your primary job.  Most of my clients with rentals have losses anyway.  But I have one client who owns about 20 properties with no mortgage interest and has a nice profit.  It is not his primary business but I'm thinking it would qualify.

 

Confusion reigns.  Yes, a profit motive must exist, but that is not enough.  There must be continuous and regular activity.  If the owner of rental property regularly provides maintenance services, that might help it qualify.  I think the number of properties can impact the trade or business status because the time commitment probably can be pretty much continuous and regular with many properties.  Maybe even regularly searching for new properties to purchase and rent out can provide the necessary level of involvement.

[Lee B]

4 minutes ago, EricF said:

  There must be continuous and regular activity.  If the owner of rental property regularly provides maintenance services, that might help it qualify.  I think the number of properties can impact the trade or business status because the time commitment probably can be pretty much continuous and regular with many properties.  Maybe even regularly searching for new properties to purchase and rent out can provide the necessary level of involvement.

You use the phrases "continuous and regular activity" and "number of properties" ?

Can you provide a cite for that because I am not aware that these are requirements in order to qualify.

If they were, how do investments in REITs and PTPs qualify ?

[EricF]

7 minutes ago, cbslee said:

You use the phrases "continuous and regular activity" and "number of properties" ?

Can you provide a cite for that because I am not aware that these are requirements in order to qualify.

If they were, how do investments in REITs and PTPs qualify ?

There is no real cite because Congress and IRS regulations have not provided a definition of "Section 162 trade or business."  It's a distillation of various court decisions over the years.  If you look at the language from the draft Pub 535 quoted earlier, "you must be involved in the activity with continuity and regularity and your primary purpose for engaging in the activity must be for income or profit."  The number of properties was my way of showing more involvement than just owning one property, collecting the rent, and doing nothing else.  Ultimately, it's a facts and circumstances determination.

Investments in REITs and PTPs can qualify because the determination of a qualifying trade or business is made at the entity level.  If the REIT or PTP operates a trade or business, the investors can take the deduction.  Material participation and active vs. passive don't matter for this purpose.  The Sec. 199A deduction can be taken by an owner, even if the owner is passive, if the business is a qualifying business.

 

[DANRVAN]

15 hours ago, joanmcq said:

I’m sorry, but if an ownership interest in a PTP or REIT qualifies when these are, for most people, nothing more than investments, my rentals, from which I derive about half my income, is a trade or business

Section 199-A was highly influenced by real estate lobbyist.   Special preference was given to owners of REITs as were owners of qualified property in the form of real estate.

Note the wording on page 21 of the TCJA BLUE BOOK:

'For taxable years beginning after December 31, 2017, and before January 1, 2026, an individual taxpayer generally may deduct 20 percent of qualified business income with respect to a partnership, S corporation, or sole proprietorship, as well as 20 percent of aggregate qualified REIT dividends, qualified cooperative dividends,104 and qualified publicly traded partnership income."

It does not list REIT dividends as QBI along with that from a partnership, S corporation, or sole proprietorship but instead states  "as well as 20 percent of aggregate qualified REIT dividends...".   Page 29 of the blue book specifically states that a 199-A deduction is allowed for "qualified" REIT dividends etc.  There is similar wording in prop reg 1-199A 3(a).

The law expands the deduction beyond QBI  to include "qualified" dividends from REITs,  therefore an investment in a REIT does not have to rise the to level of a trade or business under section  162 as does a real estate rental.

As I read it, a dividend from a REIT qualifies under section 199-A as long as it would not otherwise receive capital gains tax  preference.

 

[Lee B]

2 hours ago, EricF said:

 If you look at the language from the draft Pub 535 quoted earlier, "you must be involved in the activity with continuity and regularity and your primary purpose for engaging in the activity must be for income or profit."  

 

I see no dividing line here between owning 2 rentals or owning 20 rentals. The owner of two rentals can make a clear argument that they are involved continuously and regularly and that their primary purpose for engaging in the activity is income or profit. Where it starts getting murky is when a property manager takes care of everything.

Even then the argument can be made that the property manager was acting as the owner's agent.

[DANRVAN]

9 hours ago, Randall said:

 Most of my clients with rentals have losses anyway. 

 

And if they rose to the level of a trade or business they would reduce QBI from other sources!

 

[Terry D EA]

The CPE class I just finished made reference to 469i. This part of the regs applies to the 8582 Passive Activity Losses. It was stated the same conditions to be able to take the loss applies to determining whether rental activities gives rise to a trade or business. The main determining factor is material participation. This includes participation at the lowest level as well. However, if an individual or other entity exclusively utilizes a property management company and performs no active functions what so ever, then it does not give rise to a trade or business and does not qualify for QBID. The same would be true with passive losses. While I agree with the allowable deductions per 162 constitutes rental as a Trade or Business, I think the paragraph below helps further substantiate the position. Now, after you cross this hurdle, get ready for the asset calculations and others to determine the QBID.

(C) Real property trade or business

For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

[SaraEA]

Dear IRS:  Confusion reigns (see all of the above posts, as well as all of the similar pro and con arguments on countless other boards).  Please give us a bright line test! Here it is Jan 14, filing season opens in two weeks, and tax professionals still do not know what to do.

[Terry D EA]

3 hours ago, cbslee said:

I see no dividing line here between owning 2 rentals or owning 20 rentals. The owner of two rentals can make a clear argument that they are involved continuously and regularly and that their primary purpose for engaging in the activity is income or profit. Where it starts getting murky is when a property manager takes care of everything.

Even then the argument can be made that the property manager was acting as the owner's agent.

Agree if the property takes care of everything and the owner does not actively participate at the lowest possible level than no QBI. Also, rentals that are losses do not qualify for QBI but those losses factor in going forward and will deduct from any profits in the future years plus as I see things, the losses may be reduced as well. We have to consider every factor and treat each client individually. It appears here that one size will not fit all.

[DANRVAN]

 

4 hours ago, Terry D said:

The CPE class I just finished made reference to 469i. This part of the regs applies to the 8582 Passive Activity Losses. It was stated the same conditions to be able to take the loss applies to determining whether rental activities gives rise to a trade or business. The main determining factor is material participation. This includes participation at the lowest level as well. However, if an individual or other entity exclusively utilizes a property management company and performs no active functions what so ever, then it does not give rise to a trade or business and does not qualify for QBID. The same would be true with passive losses. While I agree with the allowable deductions per 162 constitutes rental as a Trade or Business, I think the paragraph below helps further substantiate the position. Now, after you cross this hurdle, get ready for the asset calculations and others to determine the QBID.

(C) Real property trade or business

For purposes of this paragraph, the term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Terry I am curious as to where the CPE instructor saw a reference to sec 469 in defining a trade or business under sect 199-A . I don't recall such a reference in either the TJCA BLUE BOOK or the prop. reg.   Although section 469 was used as an example on page 14 of the blue book as one of the many areas of the tax law that require a taxpayer to make a threshold determination of whether its activities rise to the level of a trade or business, it does not define a trade or business under section 469.

[Terry D EA]

I'll go back thru the materials to find the reference. I put one of sections from 469 in my post above. It is a shame we have to go to all of these lengths to support our client's position. I guess it would make entirely too much sense to have a definitive answer that allows us to draw a clear conclusion. In the mean time, I am gathering every reference I can to get ready for any challenge from the IRS. I have several rental property clients ranging from individuals to partnerships. Most materially participate, but one or two may not meet the lowest level of participation. If all of us are concerned about this new reg, I surely wouldn't want to see someone attempt to do this on their own. All those ads "prepare your taxes for free! Free E-file; etc. 

[ILLMAS]

Everytime I see a TT “a CPA has your back” commercial, I wonder if TT has the inside scope on 199a, I’m giving people the run around because I am unsure myself.

“The only thing that I know, is that I know nothing”

[Terry D EA]

All I am sure of is I started studying the 199A last May and the more I study the more confused I get. Who would have thought a 20% deduction would turn into what it has. Geez!

[BulldogTom]

58 minutes ago, Terry D said:

Who would have thought a 20% deduction would turn into what it has. Geez!

Really....anyone who watched the process of this bill getting butchered by the Washington political process knew it was going to be a cluster fudge.   SNAFU is a very appropriate acronym for the tax laws of the US.

Tom
Modesto, CA

[Jack from Ohio]

1 hour ago, BulldogTom said:

Really....anyone who watched the process of this bill getting butchered by the Washington political process knew it was going to be a cluster fudge.   SNAFU is a very appropriate acronym for the tax laws of the US.

Tom
Modesto, CA

I prefer FUBAR....

[Roberts]

6 hours ago, ILLMAS said:

Everytime I see a TT “a CPA has your back” commercial, I wonder if TT has the inside scope on 199a, I’m giving people the run around because I am unsure myself.

“The only thing that I know, is that I know nothing”

All I've told people is that my interpretation is that we can use the QBI deduction unless the IRS specifically gives us an opinion otherwise and as of right now that hasn't happened but it could at any time.

[Randall]

With taxes, I wonder if one has 20-30 years experience or one year experience 20-30 times.

 

[Christian]

Wasn't this tax bill intended to SIMPLIFY the tax code ?

[ETax847]

Talk about one confusing topic! I think I changed my mind multiple times after reading through this thread.  Ugh.  

[Lee B]

28 minutes ago, Christian said:

Wasn't this tax bill intended to SIMPLIFY the tax code ?

I remember watching the press conference at the capitol several weeks before Christmas 2017, listening to the congressional representatives talking

about tax simplification, saying that most people would be able to file on a postcard, which they were waving around in front of the TV cameras.

What you see is not always what you get.  Situation Normal !

[DANRVAN]

22 hours ago, Roberts said:

All I've told people is that my interpretation is that we can use the QBI deduction unless the IRS specifically gives us an opinion.

It works the other way Robert.  As the tax courts like to say tax deductions are granted by "legislative grace."

Both the TCJA BLUE BOOK and the prop. reg indicate that sec 162 will dictate the meaning of trade or business under section 199-A.  As we well know, it has been left up to the tax courts to define that definition under sec 162 based on the facts and circumstances of each case.

I don't expect the IRS to make a bright line determination anytime soon in regards to whether a real estate rental is a trade or business.  I recently saw a copy of the proposed technical corrections bill (now I can't find it) and did not see an clarification in regards to this issue. (I will see if I can find it and post it.)

 

[DANRVAN]

12 minutes ago, DANRVAN said:

  I recently saw a copy of the proposed technical corrections bill (now I can't find it) and did not see an clarification in regards to this issue. (I will see if I can find it and post it.)

 

https://gop-waysandmeans.house.gov/brady-releases-discussion-draft-of-tcja-technical-corrections/