The Tax Cuts and Jobs Act of 2017 created the Section 199A deduction, also known as the qualified business income (QBI) deduction. For rental real estate investors who qualify, this deduction can reduce taxable income by up to 20%.

What Is the 199A Deduction?

The Section 199A deduction allows owners of pass-through businesses — including sole proprietorships, partnerships, S-corporations, and certain trusts — to deduct up to 20% of their qualified business income. For rental real estate investors, this can translate to significant tax savings.

Do Rental Activities Qualify?

Whether rental real estate qualifies for the 199A deduction depends on whether it rises to the level of a “trade or business” under IRS standards. The IRS has provided a safe harbor: rental activities qualify if the owner or their employees perform at least 250 hours of rental services per year and maintain contemporaneous records of those services.

Maximizing the Deduction

To maximize the 199A deduction, rental real estate investors should ensure their activities meet the safe harbor requirements, consider grouping multiple rental properties into a single enterprise, and work with a tax professional to optimize their overall tax strategy. The deduction is subject to income limitations and W-2 wage limitations for higher-income taxpayers.