Evaluating Rental Property Through a Trade or Business Lens

Evaluating Rental Property Through a Trade or Business Lens

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In the management of rental properties, one critical consideration for landlords is whether the business's activity rises to the status of a trade or business. This can have significant consequences, especially with regard to taxation, such as is a rental property qualified business income. To know where your rental property stands requires looking at several operational and practical aspects.

To start to begin, there is no single standard that defines renting as a type of business. Instead, it depends on the particular facts and circumstances of each situation. The most important thing is whether the operation is carried out with consistency and regularity, as well as with the intent to earn an income. The occasional or passive rental income typically does not meet the criteria. For instance, a person who leases an individual property every year and is not involved in the rental process may not qualify, while someone actively managing multiple properties may.

Management intensity plays an important role in classification. When you, or the agent for whom you work are frequently involved in advertising, handling leases, supervising maintenance, and directly dealing with tenants, your rental activity could be elevated to that of a business. The activities of taking rent, making fixes, scheduling maintenance, or managing relationships with tenants are the evidence of conducting your business in a professional manner.

The IRS has issued guidance that includes a safe harbor for renting activities that qualify as a rental. Based on this guideline it is a good idea to perform at least 250 hours in rental services each year (including work performed by workers as well as contractors) and maintain proper records, the activity may be considered to be a business or trade. Even if you do not fall within the safe harbor it is possible to be considered a business if you meet the general criteria of regularity and intention to earn a profit.

Another relevant factor is the nature and size of properties. The management of multiple units with a clearly defined operational plan that is in place indicates an increased level of activity. Contrast this with a scenario in which a single holiday property is rented out seasonally via an entirely hands-off platform. In this case, the involvement may not be enough to be considered a business activity.

In short, determining whether your rental activity qualifies as a trade or business depends on how involved you are and how regularly you complete the property management duties. Documentation that is accurate, a active participation in operations, and a clear intent to earn a profit are good indicators. Consulting a trained professional will further 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.