The Internal Revenue Service has reaffirmed that several types of rental arrangements remain excluded from the Section 199A rental real estate safe harbor, a policy stance that matters for landlords, small investors, and pass‑through owners who seek the Qualified Business Income (QBI) deduction. As of September 7, 2025, the agency’s position is unchanged: properties used as a residence beyond a set threshold, properties under triple net leases, rentals to commonly controlled trades or businesses, and any rental interest treated as a Specified Service Trade or Business (SSTB) cannot rely on the safe harbor.
This confirmation affects who can claim up to a 20% QBI deduction tied to rental real estate, how leases should be structured, and the recordkeeping landlords must maintain to support their claims.
What the safe harbor does and why the exclusions matter
Under the safe harbor, certain rental real estate enterprises can be treated as a trade or business for QBI purposes if they meet strict operational and documentation standards. The IRS has made clear that the exclusions are longstanding and still apply.
That clarity is vital for:
- Single‑family and small multifamily landlords who want predictable tax treatment.
- Pass‑through entities (RPEs) holding commercial buildings deciding between lease models.
- Families with vacation homes that double as rentals.
- Investors with activity across several entities, where common control can trigger an exclusion.
The exclusions limit who can claim the QBI deduction via the safe harbor and shape lease drafting and day‑to‑day operations.
The four exclusions (in brief)
The exclusion list is direct: if one of the following applies, the property cannot rely on the safe harbor.
- Personal use beyond the threshold
- If the taxpayer (including an owner or beneficiary of an RPE) uses the property as a residence for more than the greater of 14 days or 10% of the days it’s rented at fair market value, that property is excluded.
- Example: A condo by the beach used privately for family vacations that exceeds the threshold is out.
- Triple net leases (NNN)
- A triple net lease requires the tenant to pay rent, utilities, property taxes, insurance, and maintenance.
- These are excluded because landlords typically perform few or no rental services under NNN structures.
- Common control rentals
- Real estate rented to a trade or business conducted by the taxpayer or an RPE that is commonly controlled is excluded.
- SSTB entanglement
- If any portion of a rental real estate interest is treated as an SSTB under §1.199A‑5(c)(2), the entire rental real estate interest is excluded from the safe harbor.
Operational tests and recordkeeping requirements
The IRS ties safe harbor eligibility to real operational work. Key requirements:
- Separate books and records for each rental real estate enterprise.
- At least 250 hours of rental services performed each year, unless the enterprise qualifies under the 3‑out‑of‑5‑years rule (for enterprises in existence more than four years).
- Contemporaneous records describing services performed, who performed them, dates, and hours.
Rental services include (but are not limited to):
- Advertising vacancies
- Negotiating and executing leases
- Collecting rent
- Operating and maintaining properties
- Performing repairs
- Management duties
- Purchasing materials and supplies
- Supervising employees or contractors
If the facts on the ground don’t match that business‑like picture—i.e., insufficient services, poor documentation, or excluded lease structures—the safe harbor is out of reach.
Practical effects for landlords and investors
- Documentation wins disputes. The IRS continues to enforce the recordkeeping requirements and strict treatment of triple net leases.
- Properties falling outside the safe harbor due to personal use, NNN leases, common control, or SSTB linkages may not qualify for the QBI deduction via the safe harbor pathway.
- That can mean higher taxable income or different structuring decisions for new investments (e.g., choosing modified gross leases over NNN to preserve safe harbor access).
Common real‑world reactions:
- Small landlords review lease terms and daily operations, then rework how they track hours and activities.
- Owners of multiple properties often set up systems to record work and keep books separate for each enterprise.
- Buyers seeking safe harbor access may favor leases that leave some maintenance or oversight duties on the landlord.
Clear examples and borderline cases
- A landlord who outsources everything to a property manager may still qualify if the manager’s work plus the owner’s supervision reaches 250 hours and logs are kept—provided none of the four exclusions apply.
- A single‑tenant retail property under an NNN lease is excluded regardless of hours, because the lease structure assigns taxes, insurance, and maintenance to the tenant.
- For short‑term rentals used for family vacations, exceeding the greater‑of 14 days or 10% rule disqualifies the property from the safe harbor.
- If any portion of a rental interest is treated as an SSTB under §1.199A‑5(c)(2), the entire rental interest is excluded.
Compliance tips and recommended sequence of actions
Advisors recommend this practical sequence for owners who care about safe harbor eligibility:
- Read every lease and list who pays taxes, insurance, and maintenance. If the tenant pays these items, the NNN exclusion likely applies.
- Write a personal use policy and compare planned stays against the greater‑of 14 days or 10% threshold.
- Map entity structures to detect rentals to commonly controlled trades or businesses.
- Confirm that no portion of the rental interest is treated as an SSTB under §1.199A‑5(c)(2).
- Set up recordkeeping:
- Separate books and records for each rental real estate enterprise.
- Logs tracking hours, dates, tasks, and who performed services.
- A plan to keep records current and contemporaneous.
Practical habits that help:
- Keep daily or weekly logs to capture hours spent on repairs, supervision, or management.
- Set calendar reminders to record maintenance supervision time.
- Require property managers to maintain compatible logs and share records.
- Assign responsibility for collecting and storing records (owner or manager).
Recordkeeping specifics to emphasize
- Contemporaneous records should show:
- What service was performed
- Who performed it
- The date and time
- Hours spent
- For enterprises older than four years, maintain evidence for the 3‑out‑of‑5‑years test if relying on that standard.
- Missing logs or inconsistent records can undermine safe harbor claims in an audit.
Human and business trade‑offs
- Choosing low‑touch income via NNN leases offers simplicity but sacrifices safe harbor access.
- Families that use vacation properties must weigh personal enjoyment against potential tax benefits.
- Pass‑through owners may need to reorganize entity structures or accept that some properties will be excluded.
- Some owners accept higher taxable income in exchange for operational simplicity; others invest in bookkeeping and active management to pursue the QBI deduction.
Where to find official guidance
For official IRS guidance and current compliance expectations, review the agency’s materials on the QBI deduction and the rental real estate safe harbor:
The IRS has also referenced Revenue Procedure 2019‑38 for detailed rules and exclusions, including the definition of triple net leases and operational requirements.
Bottom line
- As of September 7, 2025, the IRS’s position is unchanged: the safe harbor is available to rental enterprises that operate like a business and are well‑documented, but it excludes:
- Personal use beyond the greater of 14 days or 10% of rental days
- Triple net (NNN) leases
- Rentals to commonly controlled trades or businesses
- Any rental interest treated as an SSTB under §1.199A‑5(c)(2)
- Landlords who want the QBI deduction through the safe harbor must keep operations active and well‑documented and choose lease structures and personal use policies that fit the safe harbor rather than fight it.
The rules are known; the trade‑offs are clear. If you want the safe harbor, plan leases, maintain contemporaneous records, and avoid the excluded categories—or accept the consequences and structure your investments accordingly.
This Article in a Nutshell
On September 7, 2025, the IRS confirmed longstanding exclusions from the Section 199A rental real estate safe harbor that affect landlords, investors, and pass‑through owners seeking the QBI deduction. Excluded categories are properties with personal use exceeding the greater of 14 days or 10% of rental days, triple net (NNN) leases, rentals to commonly controlled trades or businesses, and any rental interest treated as an SSTB under §1.199A‑5(c)(2). Eligibility depends on business‑like operations: separate books for each rental enterprise, contemporaneous records, and generally at least 250 hours of rental services per year (or satisfying the 3‑out‑of‑5‑years rule). The IRS emphasizes documentation and strict treatment of NNN leases; without compliance, properties cannot claim QBI via the safe harbor, which may affect tax liabilities and structuring decisions. Advisors recommend reviewing leases, formalizing personal‑use policies, mapping entity control, and establishing detailed recordkeeping systems to preserve safe harbor access.
