QBI, 50% Self Rented, 50% Control Group

Thank you in advance for entertaining another question about the QBI.

Here are the facts of the situation.

Rental Business 1 is owned 50% by Business Owner 1 and 50% by Passive Owner 1. Rental Business 1 generates 50% of revenue from a self-rented unit which is leased to Business Owner 1 (50% ownership in both entities) and the other 50% of revenue for Rental Business 1 is from a unit rented to an outside third party. Rental Business 1 does not rise to the level of a trade or business for purposes of the QBI.

The 50% rule applies to the portion of income attributable to Business Owner 1 from their commonly controlled Business. Therefore, 50% of the pass-through income to Business Owner 1 should be treated as self-rented income and qualifies as QBI.

Passive Owner 1 will receive zero QBI from Rental Business 1.

1. Do I attach the 199a Supplemental Information to the K-1s for both partners or only for Business Owner 1?

2. For Business Owner 1, do I show the total income on the 199a Supplemental Information with a notation that 50% is attributable to the portion of the income that is self-rented or do I only show 50% of the total income without a notation?

3. If Business Owner 1's business is a SSTB do I show the total income on the 199a Supplemental Information with a notation that 50% is attributable to the portion of the income that is SSTB or do I show two separate lines, one marked as SSTB and the other unmarked?

4. It is my understanding that the spirit of the law in the given scenario for Passive Owner 1 is they should not treat the income as self-rented even though 50% is rented to a commonly controlled entity. I am having trouble finding the wording in the regs that states that the self-rental piece of the income only applies to those partners participating in the self-rented business. Page 104 of the final regs states "In response to comments, the final regulations clarify that the rule applies only to those who make up the 50 percent test." Am I missing a section where this is answered clearly?

Thank you

Welcome to the forum. I will take a stab at it.

The 50% rule applies to the portion of income attributable to Business Owner 1 from their commonly controlled Business. Therefore, 50% of the pass-through income to Business Owner 1 should be treated as self-rented income and qualifies as QBI.

Passive Owner 1 will receive zero QBI from Rental Business 1.

These rules are applied at the entity level, correct? It seems to me that both partners have a rental activity that is 50% SSTB and the other 50% does not qualify for 199A, based upon your comment that the rental does not rise to the level of a trade/business. If I'm correct, then I think that that resolves the rest of your questions.

JAD, I believe the spirit of the law was to have the self-rental test be at the individual level. My 4th question touches on this subject. The regs lack clarity although Page 104 of the final regs states "In response to comments, the final regulations clarify that the rule applies only to those who make up the 50 percent test." This wording seems to suggest that the self-rental rule only applies to those who make up the 50 percent test.

With that said, we agree that Business Owner 1 should report 50% of the pass-through income as QBI from the self-rented property. How would you report this on the K-1 from Rental Business 1? Should 100% of Business Owner 1's share of income appear on the 199a supplemental information with a notation that 50% is from a commonly controlled self-rental or would you simply show only the QBI portion of the partner's share of income (50%)?

Thank you for your reply.

I suppose that we disagree as to whether "spirit" enters into any interpretation of tax law. I can't take the time to find cites right now, but I will try to circle back to this later. In the meantime, perhaps others will weigh in. I think that if you were correct, you would not be the first person discussing the issue. This would be a common situation that would have been addressed clearly in regs and CPE. The main relevant concept that I am aware of is that 199A determinations are made at the RPE level.

I suppose that we disagree as to whether "spirit" enters into any interpretation of tax law. I can't take the time to find cites right now, but I will try to circle back to this later. In the meantime, perhaps others will weigh in. I think that if you were correct, you would not be the first person discussing the issue. This would be a common situation that would have been addressed clearly in regs and CPE. The main relevant concept that I am aware of is that 199A determinations are made at the RPE level.

I'm pretty sure you are right. An activity is either a trade or business (or part of a trade or business) or it's not, and when part of a RPE that determination must be made at the entity level.

How would you show the QBI in the 199a supplemental information attached to the K-1?

If 50% of the business income is self-rented and eligible for QBI while the other 50% of the business income is not QBI eligible, how would you show it?

My thinking is you would either:

1. Show the total share of business income with a note that 50% is QBI eligible, or
2. Show 50% of the share of total business income

My gut would lead me to have the rental split in two columns/activities on the 8825 and have the QBI from just the self-rental show as QBI.

I agree. That's what I came up with when trying to figure this out for passive issues. The self-rented portion is grouped with the trade/business for 469. The rest of it is passive. 2 columns on the 8825. If you group the self-rented portion with the t/b, don't forget to make that disclosure on your individual's return.

I agree.

I hear you. But I don’t do that. Takes too much time, in my view, and just isn’t value-added billable time.

I’d just make a K1 attachment that says, “x% of the attached QBI numbers should be classified as relating to an SSTB, the remainder is non-SSTB,” or something like that. Now, if there’s an easy way to leave F8825 intact, without adding another column, along with being able to simply break those 1-column F8825 numbers into SSTB and non-SSTB rows on the detailed QBI attachment, then I’d just do that.

This is what I’ve been doing and I make a similar note as to passive-to-nonpassive recharacterization under -2(f)(6).

Also, by and large, I think a lot of posts are making too much of this issue, as it relates to QBI. If you’re taking the position that the rental is a T/B, then all you end up with for the guy subject to the SSTB self-rent rule is (1) a piece that is subject to that rule and (2) a piece that isn’t. For the guy that’s just an investor, all of his income/loss is non-SSTB. He’s not self-renting.

For the guy that’s just an investor, all of his income/loss is non-SSTB. He’s not self-renting.

That's an important distinction from what we were saying above. Everything I've seen indicates that these determinations are made at the entity level. If that's true, then the entity would have to say so on the K-1.

That's an important distinction from what we were saying above. Everything I've seen indicates that these determinations are made at the entity level.

It is being made at the entity level. As per the final regs:

Accordingly, the final regulations provide that if a trade or business provides property or services to an SSTB and there is 50 percent or more common ownership of the trade or business, the portion of the trade or business providing property or services to the 50 percent or more commonly-owned SSTB will be treated as a separate SSTB with respect to related parties.

If that's true, then the entity would have to say so on the K-1.

That’s what I said above, in #9.

Ok, you and I own a commercial rental 50/50. 30% of the property is rented to your CPA firm, which you own 100%. 70% of the property is rented to an unrelated party. The 30% rental generates net income of $20,000. The 70% generates a loss of $10,000. Per OP, on their own, these rental activities do not rise to the level of a t/b.

We have common control under 1.199A-4(b)(1)(i) because you own 50% or more of each activity. The portion of the rental that is rented to your accounting practice is a trade/business due to 1.199A-1(b)(14). That portion of the rental is an SSTB since it is rented to an SSTB (cite omitted, I'm tired)

Here is where we disagree: I think that the classification of the self-rental as an SSTB applies to the whole 30%. You and I each have $10,000 of 199A income from a SSTB. The $10,000 loss on the 70% is n/a because that portion of the rental does not rise to the level of a trade/business.

You would say that you have a $10,000 199A activity that is a SSTB and I have a $10,000 199A activity due to 1.199A-1(b)(14) but it is not a SSTB?

Here is where we disagree: I think that the classification of the self-rental as an SSTB applies to the whole 30%.

Note that I was more or less speaking to reporting…and I qualified my comments in #9 with, “If you’re taking the position that the rental is a T/B…”

In any case, as to the technical issue you’re raising, the rule that says a non-business is deemed to be a business is limited to that concept, I’m pretty sure. So, at the entity (landlord/partnership) level, we now have a business. SSTB status, as per #11 is “with respect to [the] related parties.”

I'm sorry Jeff. I have read your post a couple of times, and I am not understanding. Is your position that, in my example, you have a $10,000 199A activity that is a SSTB and I have a $10,000 199A activity due to 1.199A-1(b)(14) but it is not a SSTB?

you have a $10,000 199A activity that is a SSTB and I have a $10,000 199A activity due to 1.199A-1(b)(14) but it is not a SSTB?

Yes. I’m seizing on the “with respect to the related parties” language in the regulation. This is a departure from the proposed regs and, I believe, it’s where they incorporated the language OP is asking for in his #4 of Post #1. That is, I do not think the related parties are the partnership and the operating entity (which, I believe, is your interpretation). I think the related parties are those comprising the 50% test.

People griped about this very basic issue in the proposed regs: If I am investor in a 50/50 landlord partnership, and my partner is a doctor, and our partnership leases a building to his medical practice, I shouldn’t get stuck with deemed SSTB treatment. He should, but not me. He is the common owner causing the problem.

I agree. I was focusing on the old interpretation under the proposed regs and had not realized that that all changed under the final regs. Thanks for taking the time to clear this up. Hopefully this has also helped the OP.

Your replies have definitely helped solidify my interpretation of the regs.

Thank you.

No problem. It’s confusing.

Let’s say one guy owns 100% of an operating SSTB S-corp, which leases a building from a partnership. Assume S-corp is the only tenant in the building. And the guy that owns the S-corp is a 40% partner in the partnership that owns the building. So, common ownership isn’t 50%. In that case, I believe none of the K1 rental income on the 40% partner’s K1 would be characterized as coming from an SSTB. I thought I heard they were going to make it such that this wouldn’t happen…such that the 40% guy’s K1 would all be SSTB income. But I guess they didn’t. I guess they left the 50% control requirement in the (final) regulations.

That is correct.

Mentioned earlier by multiple people was splitting the 8825 information between self-rental activity and third-party activity.

What do you do with the fixed asset that has been on your depreciation schedule for the past few years? You can't tell the tax program to allocate the asset to two separate 8825s. Accordingly, I decided to show the rental business information on one column of the 8825 and make changes only to the 199a information attached to the K-1s showing the split between self-rented and third-party.

My software has the ability to split an asset into multiple parts and reassign the asset to a different activity. Back when I was using Drake, it didn't have that capability, so I would split the asset and its accumulated depreciation manually.