Rentals as a Trade or Business for the Qualified Business Income Deduction

Abstract

Code Sec. 199A allows a 20% deduction for the qualified trade or business income of a taxpayer. For this purpose, income eligible for the deduction must be generated from the conduct of a qualified trade or business that is effectively connected with the United States and eligible income must be included in the taxpayer's income for the year. The statute does not define a trade or business. Rental income may be eligible for the 20% deduction if it arises from a trade or business but gains classified as Code Sec. 1231 (trade or business) gains when the rental is disposed of will not qualify for the 20% deduction. Code Sec. 1411 imposes a 3.8% surtax on net investment income of high-income taxpayers. Income from the operation of a trade or business is exempt from the surtax unless the taxpayer is passive with respect to the business. The Code Sec. 199A Qualified Business Income Deduction can be claimed for operating income from rental property that constitutes a trade or business pursuant to the Code Sec. 162 definition.