Evaluating Rental Property Through a Trade or Business Lens
Evaluating Rental Property Through a Trade or Business Lens
Blog Article
When managing rental properties the most important thing to consider for landlords is whether the activity rises to the status of a trade or business. This can have significant implications, particularly in taxation like is a rental property qualified business income. Knowing where your rental business stands requires looking at several operational and practical factors.
To start it off, there isn't a single rule that defines rental as a type of business. In reality, it is contingent on the particular facts and circumstances of each instance. The key is whether the activity is carried out with consistency and regularity, as well as with the goal of making an income. The occasional or passive rental income typically do not fall within this standard. For instance, a person who leases out an individual property every year with little involvement may not qualify, while someone actively managing multiple properties likely would.
Management intensity plays an important part in the classification. When you, or the agent for whom you work is often involved in advertising, handling leases, supervising maintenance, and dealing directly with tenants, your rental activity could be elevated to that of a company. Activities such as taking rent, making repairs, scheduling maintenance, as well as managing the tenant relationship are the evidence that you are doing business in a manner that is professional.
The IRS has issued guidance that includes a safe harbor for rental activities that are qualified. According to this framework it is a good idea to perform at least 250 hours in rental service per year (including work done by personnel or contractors) and maintain proper records, the activity may be classified as an enterprise or trade. Even if you do not fall within the safe harbor it is possible to be considered a business if you meet the basic requirements of regularity and the intention to earn a profit.
Another important aspect is the nature and size of properties. The management of multiple units with a clear operating system in place suggests a higher level of activity. Compare this with a scenario that a single property is rented out seasonally via a hands-off platform. In the latter case, the involvement may not be sufficient to be considered to be a business.
The key to determining if your rental activities are a business or trade is contingent on your involvement and how regularly you complete the property management duties. Documentation that is accurate, a active role in operations and a clear plan to earn a profit are good indicators. A consultation with a certified professional can further help clarify your situation based on the specific circumstances of your case.
This classification can carry significant implications, particularly for tax purposes, such as is a rental property qualified business income. For more information please visit qualified business income deduction for rental property.