The One Big Beautiful Bill Act (OBBBA), enacted in 2025, made the federal income tax deduction for qualified business income (QBI) permanent. This break was originally introduced under the Tax Cuts and Jobs Act.

Many business owners have been curious about whether and how this tax break may apply to their rental real estate activities. If you count yourself among them, here’s the scoop.

Ground Rules

Under current law, self-employed individuals, sole proprietors, and owners of the following pass-through entities may be eligible to deduct as much as 20% of their QBI:

• Partnerships,
• Most limited liability companies (LLCs), and
• S corporations.

QBI is generally defined as the net amount of qualified items of income, gain, deduction, and loss that are effectively connected with the conduct of an eligible U.S. trade or business. It doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business, or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

Special Rules and Restrictions

The deduction can’t exceed 20% of the taxpayer’s taxable income. Eligible taxpayers can claim the deduction regardless of whether they itemize deductions or pay the alternative minimum tax. However, an applicable limit begins to phase in when income exceeds certain thresholds. For 2026, these thresholds are:

• $201,750 for single and head-of-household filers,
• $201,775 for married individuals filing separately, and
• $403,500 for married couples filing jointly.

For 2026, the limit fully phases out when income exceeds $276,750 ($276,775 for separate filers and $553,500 for joint filers).

If your income exceeds the applicable fully phased-in amount, your QBI deduction is limited to the greater of:

1. Your share of 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
2. The sum of your share of 25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property.

Qualified property is the depreciable tangible property — including real estate — owned by a qualified business as of year-end and used by the business at any point during the tax year to produce QBI. (Additional rules apply.)

Starting in 2026, the OBBBA also created an inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. “Material participation” generally requires your regular, continuous, and substantial involvement in business operations. (The material-participation concept applies to this new minimum deduction; it isn’t a general requirement for claiming the QBI deduction.) The deduction amount and the QBI thresholds will be adjusted annually for inflation.

Safe Harbor for Rental Real Estate

In 2019, the IRS finalized a safe harbor that allows certain rental real estate to be treated as a trade or business for purposes of the QBI deduction. The safe harbor is available to taxpayers seeking to claim the deduction for a “rental real estate enterprise,” which is defined as an interest in real property held to generate rental or lease income. That can mean an interest in a single property or interests in multiple properties. The taxpayer must hold each interest directly or through a so-called “disregarded entity” that isn’t considered separate from its owner for tax purposes (for example, a single-member LLC).

If you satisfy the safe harbor requirements, the IRS will treat your interest in rental real estate as a single trade or business for purposes of the deduction. And if you don’t satisfy all the requirements, your interest may still qualify for the deduction if it otherwise meets the definition of a trade or business under the QBI deduction rules.

So, what are the requirements?

First, you must maintain separate books and records to reflect income and expenses for each rental real estate enterprise. For eligible enterprises that have existed for less than four years, 250 or more hours of rental services must be provided annually. For other rental real estate enterprises, 250 or more hours of such services must be performed in at least three of the past five years.

Also, you need to maintain contemporaneous records (including time reports, logs, or similar documents) that show:

• A description of rental services performed,
• The dates on which such services were performed,
• The number of hours of services performed, and
• Who performed the services.

Second, you must attach a statement to each tax return filed for any tax year you claim the safe harbor. The statement should include a:

1. Description of all rental real estate properties included in each rental real estate enterprise,
2. Description of rental real estate properties acquired and disposed of during the taxable year, and
3. Representation that the requirements have been fulfilled.

Certain rentals, however, generally don’t qualify for the safe harbor. These include real estate used by the taxpayer as a residence or rented or leased under a triple-net lease, where the tenant pays taxes, insurance, and maintenance. Rental real estate leased to a commonly controlled trade or business is also excluded from the safe harbor, but such an arrangement may still qualify for the QBI deduction under separate rules.

A Closer Look at Rental Services

According to IRS guidance, rental services are broadly defined and include:

• Advertising to rent out the property,
• Negotiating and executing leases,
• Verifying information contained in rental applications,
• Collecting rent,
• Operating, maintaining, and repairing the property (including buying materials and supplies),
• Managing the property, and
• Supervising employees and independent contractors.

Rental services can be performed by you (the owner) or your employees, agents, or independent contractors whom you engage. Note that the term doesn’t include financial or investment management activities — such as arranging financing, procuring property, studying and reviewing financial statements or operational reports, improving property, or spending time traveling to and from property.

Key Question

The good news is that running a sole proprietorship or pass-through business that conducts rental real estate activities doesn’t automatically disqualify you from claiming the QBI deduction. And the bad news? It doesn’t automatically entitle you to it either.

The key question is whether your rental activities constitute a trade or business under the QBI deduction rules or otherwise qualify under the IRS safe harbor for rental real estate enterprises. Your Isdaner tax advisor can help you evaluate your company’s eligibility, maximize any available deductions, and maintain detailed records to support the claim.