QBI + rental real estate safe harbor (Rev. Proc. 2019-38) — still usable?
client has 2 SFR rentals in CA. wants to claim §199A on rental income.
Rev. Proc. 2019-38 safe harbor requires:
- separate books for each rental enterprise
- 250+ hours of rental services per year (owner, employees, or contractors)
- contemporaneous logs
- statement attached to return
2 properties at arms length management... hitting 250 hours is a stretch. she estimates ~180 hours. close but under.
questions:
- can she aggregate properties with a commercial? no — safe harbor only for residential OR commercial, not mixed
- if she doesn't hit safe harbor can she still claim §199A by meeting the §162 "trade or business" standard independently? yes in theory but fact-specific and weak for passive SFR
i'm leaning: no QBI this year, bump hours next year.
3 replies
your analysis is right. the 250-hour bar is real and the safe harbor is rigid. at 180 hours she's in §162 "trade or business" territory which for passive SFRs is historically a hard sell (Bishop v Commr, Hazard v Commr line of cases).
in practice for 2 SFRs the easiest fix next year is either (a) self-manage rather than use a PM (self-management hours count) or (b) hire a local handyman and document his hours toward the 250. contractor hours count toward the safe harbor even though they're not employee hours.
for 2025 file without QBI claim. can always amend if facts change.
clean path. i'll tell her to track better in 2026 if she wants to try again.
UK equivalent is the FHL (Furnished Holiday Let) regime which got abolished effective April 2025. so now UK rentals can't access any of the small-business tax reliefs that SFRs can in the US under QBI. worse outcome here.
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