In regard to rental income for farm landlords:
1) A Safe Harbor provision provides that rental income will automatically be Qualified Business Income (QBI) that qualifies for the 20% deduction if:
a. Separate books and records are maintained for each real estate enterprise;
b. Taxpayers provide at least 250 hours of actual work for each real estate enterprise between 2019 and 2022;
i. The work must be related to maintaining the real estate, including (1) advertising to rent, (2) negotiating and executing leases, (3) verifying information, (4) collection of rent, (5) daily operation, maintenance and repair of property, (6) management of real estate, (7) purchase of materials, and (8) supervision of employees and independent contractors.
ii. Work related to financial or investment management services, such as (1) arranging financing, (2) procuring property, (3) studying and reviewing financial statements or reports on operations, (4) planning, managing, or construction of long-term capital improvements, or (5) traveling to or from the real estate is NOT included.
iii. Beginning in 2023, taxpayers only need these hours in three out of five years.
c. Taxpayers maintain contemporaneous records, including time reports documenting the 250 hours; and
d. Taxpayers include a statement on their returns verifying that the rental enterprise meets the above requirements.
2) The Safe Harbor provision is not available for triple-net leases, even if the landlord is able to prove 250 hours of work.
3) A farm landlord does not need to meet the Safe Harbor rules if the rent income is paid by a farm operation which has common ownership with the landlord.
4) The final regulations expanded the definition of related parties for determining common ownership to include brothers and sisters in most situations. Rental income received by an individual or pass-through entity (as landlord) from an entity under common ownership with the landlord is QBI.
5) Rents paid by a C corporation (as tenant) under common ownership with the landlord will NOT automatically qualify the rental income as QBI. A farm landlord receiving rental income from a C corporation will need to meet the Safe Harbor rules shown above. In that situation the rental income likely would become subject to self-employment tax.
Call our office to schedule an appointment if you are concerned about how these regulations could impact your operation.