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San Jose tax deduction lawyer real estateUnder the Tax Cuts and Jobs Acts of 2017, certain owners of rental properties may be eligible for a significant tax deduction. The law allows for a 20 percent deduction against “qualified” business income for pass-through businesses. In determining whether someone qualifies for this deduction, a key consideration is whether the taxpayer engages in a “qualified trade or business” for purposes of Section 199A of the Internal Revenue Code. In some cases, it can be difficult to determine whether a business meets these qualifications, and the IRS has issued additional guidance about safe harbor for rental real estate businesses.

Qualifying for Safe Harbor

According to the IRS, the 20% qualified business income (QBI) deduction can only be taken against business income, rather than real estate investments. To achieve the required classification as a qualified trade or business, the IRS has set forth two major requirements for owners of rental real estate.

First, real estate property must be directly owned by an individual taxpayer or by an eligible pass-through entity. Second, the taxpayer must document 250 hours of rental services each year. Rental services encompass numerous activities, such as arranging advertising, collecting rent, supervising employees, and performing maintenance. Such activities that are performed directly by the owner or by an employee, agent, or independent contractor on behalf of the business will count toward the 250-hour requirement.  

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