Does rental real estate qualify as a trade for QBI under 199A?

The Internal Revenue Service has kept in place a key safe harbor that lets many landlords treat their rental real estate as a trade or business for the Section 199A Qualified Business Income (QBI) deduction, a move that continues to shape tax planning for small landlords across the United States 🇺🇸. Under Revenue Procedure 2019-38, taxpayers who run a “rental real estate enterprise” can claim the QBI deduction if they meet specific recordkeeping and service-hour standards.

As of September 7, 2025, there have been no major changes to this framework, but tax professionals say the rules still matter for anyone collecting rent — including immigrant families who rely on one or two units to help pay the mortgage. The central question — when a landlord activity rises to a trade or business — remains driven by clear criteria that can be met with careful systems and steady work.

What the Safe Harbor Does

At the core, the safe harbor provides a practical path for taxpayers to claim the QBI deduction for rental income when the activity is run in a business-like way.

• The IRS defines a rental real estate enterprise (for QBI purposes only) as an interest in real property held to generate rental or lease income.
• This can be a single house, a duplex, or a group of similar properties.
• If the enterprise meets the safe harbor, it is treated as a trade or business for the QBI deduction.
• If it misses the safe harbor, a landlord may still qualify under the broader Section 162 “trade or business” standard, which requires the activity to be regular, continuous, and substantial with a clear profit motive.

This two-track approach offers flexibility, but the safe harbor gives bright lines many find easier to follow.

Key Requirements of the Safe Harbor

To qualify under the safe harbor, taxpayers must meet several specific requirements:

• Ownership structure
  • The taxpayer or relevant pass-through entity must hold each interest directly or through a disregarded entity (e.g., a single-member LLC).
• Separate accounting
  • The enterprise must keep separate books and records that track income and expenses for the rental activity.
• Service-hour test
  • The enterprise must show at least 250 hours of rental services in the tax year.
  • For enterprises older than four years, the 250-hour requirement can be met if you have 250 hours in at least three of the last five years.
• Who counts
  • Owners, employees, agents, and independent contractors may all be counted toward the service-hour total.

These provisions help landlords who hire property managers but still oversee or direct the work.

What Counts as Rental Services (and What Doesn’t)

Rental services that typically count include day-to-day, hands-on tasks tied to operations:

• Advertising for tenants
• Screening renters
• Negotiating and signing leases
• Collecting rent
• Handling maintenance and repairs
• Coordinating property management
• Supervising vendors

Activities that generally do not count:

• Arranging financing
• Reviewing investment reports or planning
• Travel time to and from the property
• Work tied to personal use of the unit
• Units rented to the owner’s own trade or business
• Properties under triple net (NNN) leases

Triple net leases (where the tenant pays taxes, insurance, and maintenance) are specifically excluded from the safe harbor.

Recordkeeping and Election Procedures

The IRS requires contemporaneous records documenting services performed:

• Logs or time reports showing:
  • Dates
  • Hours
  • Descriptions of work
  • Who performed the work
• Records should be ready when filing the return.
• Common tools used in practice: a simple spreadsheet, a calendar, or property management software.
• A brief statement must be attached to the tax return to elect the safe harbor for the rental real estate enterprise.

Consistency matters: owners can treat each property as its own enterprise or group similar properties (e.g., all residential vs. all commercial), but they cannot mix residential and commercial into one enterprise. The chosen approach should be maintained year to year unless there is a clear reason to change.

Practical Impact on Landlords and Small Business Owners

• The QBI deduction can reduce taxable income by up to 20% of qualified business income (subject to wage and property limits at higher income levels).
• Savings can help fund repairs, cover insurance, or offset rising interest costs.
• In immigrant- and small-business-heavy neighborhoods, the tax treatment of landlords can affect local stability, job creation, and building maintenance.
• The safe harbor benefits smaller owners who do not have a formal property company but treat their rentals like a business.

However, the rules draw a clear line: passive, set-and-forget investors who rarely engage in operations are unlikely to meet the 250-hour threshold or the Section 162 trade-or-business standard.

Common Pitfalls and How to Avoid Them

• Triple net leases: If the tenant handles taxes, insurance, and maintenance and the owner has little operational involvement, hours rarely add up and the safe harbor is not available.
• Personal use: If an owner uses a unit as a residence under tax rules — even part of the year — that property does not qualify for the safe harbor.
• Travel time: Time spent driving to distant properties does not count toward rental services hours.
• Grouping inconsistency: Grouping properties conveniently can help reach the hour threshold, but switching grouping approaches without reason can weaken audit defense.

For many landlords—especially immigrant owners—these rules are manageable with good habits: treat the rental like a business, log time as you go, keep clear books, and plan lease terms with the safe harbor in mind.

Compliance Steps and Documentation Tips

1. Keep separate books and records for each enterprise (a ledger or software is fine).
2. Track 250 hours of rental services each year (or meet the 3-of-5-year rule for older enterprises).
3. Maintain contemporaneous records: dates, hours, who performed the service, and a short description.
4. Avoid or reconsider triple net leases if you want the safe harbor.
5. Decide whether to treat each property individually or to group similar properties — and stay consistent.
6. Attach the required safe harbor statement with your tax return.

Policy Framework and Current Status

• The IRS has not overhauled the Section 199A rental real estate safe harbor; Revenue Procedure 2019-38 still governs.
• The safe harbor is elective and applies only for QBI purposes — it does not determine treatment for other tax rules.
• Tax advisors note that even without the safe harbor, many landlords can qualify under Section 162 if their activities are regular, continuous, and profit-driven.
• For audit defense and clarity, the safe harbor’s bright lines — especially 250 hours and separate books and records — remain important.

The IRS also confirms: triple net leases are excluded. Mixed-use portfolios require thoughtful grouping (residential grouped separately from commercial) and consistent recordkeeping.

Resources

Taxpayers seeking official guidance should review the IRS page on the QBI deduction, which links to the core rules, including Revenue Procedure 2019-38: Qualified Business Income Deduction

Final Takeaways

The safe harbor is a choice, not a requirement. If you cannot meet the 250-hour mark, you may still show your rental activity qualifies as a trade or business under general rules — but that path can involve heavier documentation and more risk in an audit.

For many hands-on landlords, the safe harbor is the straightest, clearest route to the QBI deduction: keep clean, separate records; log hours contemporaneously; structure leases thoughtfully; and be consistent in how properties are grouped and reported. These simple systems often enable small owners — including immigrant households and solo landlords — to capture tax benefits that meaningfully affect cash flow and property stewardship.