Written by Randall Weaver, CPA and Anthony Calamia, CPA, CMA, MBA
As a real estate investor, an important tax benefit is the Qualified Business Income (QBI) deduction, a provision introduced under the Tax Cuts and Jobs Act (TCJA) in 2017. This deduction allows eligible taxpayers to deduct up to 20% of their net business income, effectively lowering their taxable income and reducing their overall tax liability.
While this deduction has been a valuable tool for many real estate investors, understanding how to qualify and maximize the benefits can be complex. This article will explore real estate strategy to navigate the Qualified Business Income (QBI) deduction, how to qualify for it, and tips for maximizing its benefits.
The QBI deduction allows sole proprietors and owners of pass-through entities, such as partnerships, LLCs, and S-corporations, to potentially deduct up to 20% of their business income. QBI refers to the net income generated by your business, excluding items such as capital gains, dividends, and interest income. For real estate investors, this could include rental income from properties, provided that certain conditions are met.
The deduction is available to individuals and owners of pass-through entities who report business income on their tax returns. QBI was designed to help small businesses and self-employed individuals reduce their tax burden. Working with an experienced CPA can help real estate investors unlock significant tax savings.
For real estate investors to qualify for the QBI deduction, they must meet specific requirements. The IRS outlines these guidelines to ensure that investors use rental properties as a business rather than as passive investments. Here are some essential qualifications:
1. Rental Activity Must Be Considered a Trade or Business
One of the primary requirements to qualify for the QBI deduction is that the rental activity must be conducted as a trade or business. The IRS defines a trade or business as any activity carried out with the intent of making a profit. QBI regulations refer to Sec 162 of the tax code for defining a trade or business.
Real estate investors can meet this requirement by engaging in regular and continuous activity in relation to the property. The investor can carry on this activity personally or through an agent. QBI does not require material participation by the owner of the activity. Thus, the activity may be considered passive but still qualify for QBI purposes.
2. Income Thresholds and Limitations
There are income thresholds that impact the eligibility for the QBI deduction. For tax year 2025, single taxpayers with taxable income over $197,300 and joint filers with taxable income over $394,600 are subject to limitations. For high-income earners, the deduction may be phased out or subject to additional restrictions, depending on the nature of the business.
For real estate investors, this means that if your taxable income exceeds these thresholds, you may be limited in how much of the QBI deduction you can claim.
Real estate investors have several strategies at their disposal to qualify for and maximize the QBI deduction. While each investor’s situation is unique, the following approaches can help you increase your eligibility and maximize your deduction.
1. Aggregate Your Properties
If you have multiple rental properties, another way to ensure that you maximize the QBI deduction is to aggregate your properties. This becomes more complex depending on the ownership of the properties being aggregated and there are many considerations and limitations that need to be considered.
2. Self Rental Exception
If an investor or group owns a property that rents to a trade or business and that investor or group of persons own at least 50% of the trade or business, that rental activity automatically qualifies for QBI.
For real estate investors with higher taxable incomes, the QBI deduction may be subject to additional limitations. These limitations can impact the overall benefit of the deduction. If your taxable income exceeds these thresholds, your deduction may be limited or eliminated based on your business activities. It’s beyond the scope of this article but there can be additional limitations if the business is considered a specified service trade or business (SSTB).
For non-SSTBs, once you are over the established income threshold, the QBI deduction for each trade or business could be partially or fully reduced to the higher of the following:
The QBI deduction provides a powerful tax-saving opportunity for real estate investors, offering up to 20% in tax relief on net rental income. By understanding the eligibility requirements and implementing strategies to maximize this deduction, real estate investors can significantly reduce their taxable income and keep more of their profits.
Whether it's making sure there is regular and continuous involvement, or managing income thresholds, there are numerous strategies available to optimize the QBI deduction. Given the complexity of these rules and their impact on your tax situation, it's crucial to work with a knowledgeable tax professional who can help you navigate these provisions and ensure that you maximize the benefits of QBI.
It should be noted that there is current legislation to extend QBI beyond 2025 and potentially even increase the deduction to 23%.
At Trout CPA, we specialize in helping real estate investors navigate the intricacies of tax planning, including the QBI deduction. Contact us today to learn how we can help you optimize your tax strategy and maximize your savings.
To learn more about how you can take advantage of the QBI deduction, reach out to the experts at Trout CPA. Our team is here to provide you with personalized tax advice and strategies to help your real estate investments thrive.