Rental Real Estate Safe Harbor: What Counts as Rental Services for QBI

How the QBI Deduction Works for Real Estate Investors

Under Section 199A, qualifying taxpayers may deduct up to 20 percent of qualified business income from a pass-through trade or business. For rental real-estate owners, this applies only when rental activity rises to the level of a business. To clarify eligibility, the IRS issued Revenue Procedure 2019-38, which remains in effect for the 2025 tax year. The safe-harbor framework lets landlords prove their activity qualifies as a trade or business if specific standards are met.

Note on current law

Under the Tax Cuts and Jobs Act, the Section 199A Qualified Business Income deduction is scheduled to apply through tax years beginning before January 1 2026. Unless extended by future legislation, the deduction will not be available for later tax years. Current IRS guidance remains in effect for 2025 filings.

Requirements for the Safe Harbor

To use the safe harbor for each rental-real-estate enterprise:

● Keep separate books and records for income and expenses.

● Perform and document at least 250 hours of rental services during the year.

● Maintain contemporaneous records showing hours, tasks, dates, and who performed the work.

● Attach a safe-harbor statement to your return confirming these conditions.

If you don’t meet these exact criteria, you may still qualify for QBI under the general trade-or-business rules of Section 162, but without the certainty of the safe-harbor protection.

What the IRS Counts as Rental Services Counts as Rental Service   

These services can be done by owners, employees, property managers, or contractors. Investor-level work does not qualify.

How to track your 250 hours  for the IRS safe harbor:

Maintain this log all year; total at least 250 hours to rely on the safe harbor.

Rental Income and Deductible Expenses

The IRS defines rental income as any payment or fair-market value received for the use of real property. Deductible expenses include mortgage interest, property tax, maintenance, insurance, and management fees. IRS Topic 414 and Topic 415 provide the most up to date explanations of rental income, deductible expenses, and how rental activity is reported.

When Your Rental Activity Qualifies Under Section 162

If you don’t meet the safe-harbor criteria, you can still demonstrate your activity qualifies as a trade or business under Section 162. The IRS requires that it be regular, continuous, and conducted with a profit motive. See the Instructions for Form 8995 for current filing language.

Quick Filing Checklist:

● Keep separate ledgers for each enterprise

● Track qualifying rental-service hours with dates and descriptions

● Confirm at least 250 hours annually

● Attach the safe-harbor statement when filing Form 8995 or 8995-A

Taxes for rental real estate can feel complicated, especially when you want to be sure you are documenting things the right way and not missing a deduction you qualify for. If you want clarity and confidence in how you apply the IRS safe harbor, working with a specialist makes all the difference.

Schedule a consultation with a real estate tax CPA experienced in Section 199A safe harbor and rental business structuring.

FAQ

Do I have to use the safe harbor to claim QBI? No. It’s optional but gives a clear path to show your activity qualifies as a business.

Can contractor hours count toward 250? Yes. Hours worked by property managers or independent contractors qualify when documented.