Los Angeles, CA asked in Real Estate Law and Business Law for California

Q: I own a condominium which is a rental property and managed by a property management company.

Does the rent received qualify as qualified business income? And is the rental of the property considered as a pass-through business?

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1 Lawyer Answer
James L. Arrasmith
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  • Sacramento, CA
  • Licensed in California

A: The rental income from your condominium may qualify as Qualified Business Income (QBI) for federal tax purposes, and the rental property could be considered a pass-through business. However, there are some factors to consider:

1. Qualified Business Income (QBI): The rental income from your condominium may be treated as QBI if the rental activity qualifies as a trade or business under Section 162 of the Internal Revenue Code. The IRS generally considers rental real estate activities as a trade or business if you, as the property owner, are actively involved in the management and operation of the property.

2. Pass-through business: If your rental activity is considered a trade or business, it may be treated as a pass-through entity for tax purposes. Pass-through entities, such as sole proprietorships, partnerships, and S corporations, allow the income and deductions to "pass through" to the individual tax returns of the owners.

3. 20% QBI deduction: If your rental income qualifies as QBI, you may be eligible for a 20% deduction on your QBI, subject to certain limitations and phase-outs based on your taxable income.

4. Property management company: Even if you have hired a property management company, you may still be considered actively involved in the rental activity if you participate in making significant management decisions, such as approving tenants, setting rental terms, and approving capital expenditures.

It's important to note that the determination of whether your rental activity qualifies as a trade or business and if the income is considered QBI can be complex. It is recommended that you consult with a qualified tax professional who can evaluate your specific situation and provide guidance based on the most current tax laws and regulations.

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