When can passive activity losses be used to offset other taxable income?
The Qualified Business Income deduction has become one of the most important tax provisions for real estate partnerships and investors.
Created under Section 199A of the Tax Cuts and Jobs Act and recently made permanent through the One Big Beautiful Bill Act, the deduction allows eligible taxpayers to deduct up to 20% of Qualified Business Income from certain pass through businesses.
For many real estate owners, the Qualified Business Income deduction can significantly reduce taxable income, especially when rental operations rise to the level of a trade or business. In practical terms, QBI generally includes the net income generated from rental real estate activities conducted through partnerships, LLCs, S corporations, or sole proprietorships. For owners of passthrough entities, that income and related Section 199A information are commonly reported throughSchedule K-1.
One of the most common questions investors ask is how does QBI deduction work for rental real estate. The answer depends heavily on whether the activity qualifies as a business rather than passive investment activity. The IRS safe harbor rules generally require separate books and records, at least 250 hours of rental services annually, and detailed documentation of operational activities.
For taxpayers who qualify, the real estate QBI deduction may equal as much as 20% of eligible net rental income, subject to income thresholds and wage or property limitations. Under the new legislation, those thresholds increased to $75,000 for single filers and $150,000 for married couples filing jointly, providing additional flexibility for many investors. The law also introduced a minimum deduction of approximately $400 for taxpayers with at least $1,000 in Qualified Business Income.
Understanding how to calculate QBI deduction requires careful analysis of taxable income, depreciation, wages, and the underlying structure of the partnership. Real estate partnerships with multiple properties may also benefit from grouping elections, which can help certain activities qualify more effectively under Section 199A rules.
The permanence of the deduction is particularly meaningful for developers and long-term investors because it creates more certainty for future planning. Rather than facing the previous expiration timeline, taxpayers can now build acquisition, depreciation, and cash flow strategies around a more stable tax framework.
The passage of the One Big Beautiful Bill Act also dramatically increased the value of cost segregation studies for real estate owners and partnerships.
Cost segregation allows taxpayers to identify portions of a building that can be depreciated over shorter recovery periods rather than the traditional 27.5 year or 39 year schedules. Certain components may qualify for 5 year, 7 year, or 15 year treatment, accelerating depreciation deductions and improving near term cash flow.
Under the new legislation, 100% bonus depreciation was made permanent for qualifying property placed in service after January 19, 2025. That change substantially increases the immediate value of cost segregation studies because qualifying assets may now be fully expensed in the first year.
The percentages vary by property type. Office buildings may reclassify up to 20% of depreciable basis into shorter life assets, while garden style apartment projects often reach 25% to 30%. Warehouses may range from 5% to 22%, and golf courses or RV parks can exceed 40% due to extensive land improvements.
Many investors overlook that cost segregation can also be applied retroactively through catch up depreciation adjustments without amending prior returns. This creates opportunities for owners who acquired properties years ago but never completed a study.
These changes arrive alongside other evolving state level developments, including the Latest Colorado Tax Change discussions affecting pass through entities and multistate investors. Together, the new federal provisions and state level adjustments are reshaping long-term planning strategies for real estate partnerships and developers.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Rick Suid, Partner in Bennett Thrasher’s Financial Reporting & Assurance practice with extensive Real Estate industry experience, or call us at 770.396.2200.
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