Is this rental activity considered a business for tax purposes?

Mad
Mad Member Posts: 1 Newcomer
in Income

Hello,

When entering information about a rental property there is a question:
"Is this rental activity considered a business for tax purposes?"

What are the implications of selecting 'Yes' versus 'No'?

The property is a 3 family home in which I occupy 1 unit and rent out the other 2 units.

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Comments

  • GeorgeM
    GeorgeM FreeTaxUSA Agent Posts: 19

    Hello Mad:

    If your rental property were a business, it would no longer be considered a passive activity.  Having a rental property is generally considered a passive activity and the income earned in connection with that rental property is considered passive income.  A passive activity is one in which you do not materially participate.

    Generally, the tax implications of having a rental property that qualifies as a trade or business means that the rules and regulations that apply to trades or businesses may now apply to your rental property business.  For example, the qualified business income deduction—which reduces that portion of business income subject to tax by 20%—may apply to a rental activity that qualifies as a trade or business assuming certain other requirements are met.  

    Additionally, if your rental property qualified as a trade or business you would probably be preparing a Schedule C, Profit or Loss From Business rather than a Schedule E, Supplemental Income and Loss.   

    A Schedule C business that produces a net loss, such net loss can be used to offset ordinary income.   In contrast, losses generated in connection with a rental property that does not qualify as a trade or business are characterized as passive losses, and such losses can only be used to offset passive income.  Thus, losses generated in connection with purely rental activities are more limited in scope versus those that are generated in connection with a Schedule C business.

    There is a lot more that can be said about the question you raise and we have some great articles that go into a lot more detail about this issue.  For example, here is the link to one post that discusses material participation which you may find very helpful.

    https://www.freetaxusa.com/answers?faq=1135

    Here is a link to another post that discusses whether a rental property qualifies as a trade or business which you also might find very helpful.

    https://community.freetaxusa.com/kb/articles/167-does-my-rental-income-qualify-for-the-qualified-business-income-qbi-deduction

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