Single Rental Property QBI - Anyone else doing this?

I know that the topic of QBI has been beaten to death on this forum. However, after hours of research I could only arrive at the following conclusion:

For taxpayers with even a single rental property, the property should generally be included in QBI unless it is a triple net lease.

As much as I try to avoid blanket statements, the guidance seems to force this treatment. This is especially true since we cannot assess whether a single rental property constitutes a trade or business simply by looking at whether it is generating income or losses.

So is anyone else applying this treatment to taxpayers with single rental properties?

Thanks in advance!

Yes for 2018.

No for 2018.

Yes, as long as the client has a profit motive and is regularly and continuously involved in the rental activity, per Commissioner v. Groetzinger, 480 U.S. 23 (1987). I don't consider whether the rental generated a profit or a loss as a factor.

Only if they meet the 250 hours of service requirement. This includes work performed by third parties like a gardener. Under the proposed safe harbor, a "rental real estate enterprise" would be treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise.

250 hours is one of the three safe harbor requirements. Doesn't apply if the rental is a trade or business.

There you go, Alex. I hope this satisfies you and settles this question once and for all.

Only if they meet the 250 hours of service requirement.

What about this statement in Notice 2019-07:

If an enterprise fails to satisfy the requirements of this safe harbor, the rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in §1.199A-1(b)(14).

Dave829, OP was asking if anyone else was treating a single rental property as a business per se.

As you hinted at in a prior post, there are two requirements for an activity to rise to the level of a trade or business:
Good faith intention to make a profit
Considerable, regular, and continuous activity

It's subjective, and yes, anyone can argue that their single rental property is a business. it will be interesting to see what the outcome of the first audits will be.

Thank you all for your replies. It's fascinating that the legislation was written in such a way as to cause X tax professionals to look at this issue in X different ways. Even after all of the discussions, there still does not seem to be any sort of consensus.

Yes, that's because no one really knows what the IRS means with considerable, regular and continuous activity, including the IRS itself. Do you have a business if you spend an hour a week on your rental? It's certainly regular. What if you spend 40 hours renovating the rental in one month and after that only a few hours each month? One month would qualify for considerable activity but what about the other 11 months? What if it takes you many, many hours to do the rental administration while an employee who does the same work, can do that same administration in less than an hour? This could qualify as considerable, regular and continuous activity .... however the IRS may ask questions. I'm sure we'll see many interesting cases of taxpayers arguing that their rental is a business.

I suspect you can take any position you want and it won't be questioned. I wonder what the chains have been doing.

I suspect you can take any position you want and it won't be questioned.

Considering the legislation is murky and the legislative intent is murky it's no wonder IRS has trouble writing regs that make it all clear.
I agree - you can do whatever you want and it won't be wrong.

I don't agree that "you can do whatever you want and it won't be wrong." Although there are many factual variations, Groetzinger set forth the elements to be considered, and as long as you have reasonably concluded that the client has satisfied these elements, you're okay:

We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify.

At some point this will be brought back to the courts. After all, let's think about: "We accept the fact that to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and that the taxpayer's primary purpose for engaging in the activity must be for income or profit" in the context of a triple net lease.

The taxpayer collects rent for the purpose of income or profit and he collects that rent with continuity and regularity. Therefore he decides that his rental activity is in fact a trade or business and qualifies for a 199A deduction. Even if it is a triple net lease. Will IRS agree with him? Probably not. Will the courts? That is a little harder to predict

Yes, that's because no one really knows what the IRS means with considerable, regular and continuous activity, including the IRS itself.

All of this dates back to 1941, when the Supreme Court declared:

To determine whether the activities of a taxpayer are "carrying on a business" requires an examination of the facts in each case. As the Circuit Court of Appeals observed, all expenses of every business transaction are not deductible. Only those are deductible which relate to carrying on a business. The Bureau of Internal Revenue has this duty of determining what is carrying on a business, subject to reexamination of the facts by the Board of Tax Appeals, and ultimately to review on the law by the courts on which jurisdiction is conferred.
- Higgins v. Commissioner, 312 U.S. at 217-218

They basically foisted the duty of interpreting the term onto what would become the IRS, then they told the lower courts to keep an eye on them.

The Second Circuit, which had previously tried the case, also declined to offer a definition, offering instead that Higgins' investment activities would not be considered a business "[b]y the common speech of men" (Higgins v. Commissioner, 111 F.2d at 796). In my mind, this is no better than Justice Stewart's "I know it when I see it" in Jacobellis v. Ohio (378 U.S. at 197).

Stewart's cop-out was in lieu of defining a certain other phrase that had entered the "common speech of men" at the time. Could this be the long-lost case law sibling of the term "trade or business"? Don't forget "for-profit activity" and "not-for-profit activity", they've got their own counterparts too.

The taxpayer collects rent for the purpose of income or profit and he collects that rent with continuity and regularity. Therefore he decides that his rental activity is in fact a trade or business and qualifies for a 199A deduction. Even if it is a triple net lease. Will IRS agree with him? Probably not. Will the courts? That is a little harder to predict

Although the IRS stated in Notice 2019-07 that a triple net lease won’t qualify for the rental safe harbor, there have been a few court cases where despite leasing real estate on a “net lease” basis, either the IRS or the courts have agreed that the rental activity WAS a section 162 trade or business:
* Lewenhaupt, 20 T.C. 151 (1953) (https://www.leagle.com/decision/195317120stc1511153), aff’d. per curiam 221 F.2d 227 (9th Cir. 1955)
* Watson Land Co., 799 F.2d 571 (9th Cir. 1986) (https://casetext.com/case/watson-land-co-v-cir), aff’g., rev’g. in part and rem’g. T.C. Memo. 1983-187
* Moss, T.C. Memo. 1986-128 (https://www.leagle.com/decision/198679351futcm7421617), aff’d. 831 F.2d 833 (9th Cir. 1987)
* CRSO, 128 T.C. 153 (2007) (https://www.ustaxcourt.gov/UstcInOp/Opi ... px?ID=7394).

Perhaps the conclusion that can be drawn from these cases is that whether renting property on a “net lease” basis rises to the level of a section 162 trade or business depends on the facts, and that having a “net lease” is only one factor, not the only factor, that needs to be considered in deciding whether the rental is a section 162 trade or business.

I agree - you can do whatever you want and it won't be wrong

You misunderstood me...I said it wouldn't be questioned. I don't agree that it won't be wrong.

dave829, thank you for the citations. The assumption that rentals not covered by the ridiculously restrictive "safe harbor" don't qualify for 199A has always struck me as absurd and I never was quite convinced that a triple net lease is a bar to taking a QBI deduction.

I don't consider whether the rental generated a profit or a loss as a factor.

I'd wager that puts you in a distinct minority, especially when self-preparers are taken into account.

While the erudite scholars here debate the fine points of the law, please consider what is known and not known about this topic by the general voting public:

1) not known - "Investors accounted for more than 11 percent of U.S home purchases in 2018, the highest on record and nearly twice the level before the 2008 housing crash" (source: Wall Street Journal). In the aftermath of 2008, a huge transfer of residential properties from owner-occupied to investor-owned occurred, and it's just getting bigger every year. Owning America's housing is becoming just another big business, like Amazon and Citibank and Facebook oh my, but this time the "litte guy" they're putting out of business is the homeowner. Unless they read the WSJ, the average American is not aware of this, because no one talks about it.

2) known - rents in many areas have far outpaced inflation (remember, inflation has been very flat for the last five or more years)

3) known - landlords are investors who take a financial risk while sitting back and collecting a check every month, not entrepreneurs who toil and sweat long hours to grow their businesses and create new jobs along the way.

4) not known - The TCJA, a $1.5+ trillion cut in tax revenue without offsetting spending cuts, includes a significant tax cut for landlords, many of whom are profitable not only in terms of cash flow and economics, but even on the tax return. And remember, this provision (to allow landlords a QBI deduction based on UBIA) was added at the last minute as a sop to the last hold out Senate vote to get to the absolute bare minimum needed to pass the law. https://www.politico.com/story/2017/12/ ... ond-302482