The QBI Deduction (Section 199A) and Rental Property

Rental income can qualify for the federal qualified business income (QBI) deduction under IRC § 199A, which is 20% of qualified business income, but only when the rental is a trade or business. Rev. Proc. 2019-38 gives a safe harbor built around 250 hours of rental services a year and contemporaneous records, and rentals that miss it can still qualify under the general trade-or-business standard. The 2025 federal law (OBBBA) made § 199A permanent; California has no QBI deduction at all.

The short version

• The deduction is 20% of qualified business income (§ 199A). The 2025 law made it permanent for tax years beginning after December 31, 2025.
• Only income from a § 162 trade or business counts. A rental can meet that standard, and material participation is not required for the regular deduction.
• The Rev. Proc. 2019-38 safe harbor requires separate books, 250 or more hours of rental services, contemporaneous records (for tax years beginning in 2020 and later) and a statement attached to a timely filed return.
• Triple net leases and homes you use as a residence under the 14-day / 10% test are excluded from the safe harbor.
• Above a taxable income threshold ($394,600 married filing jointly and $197,300 for other returns for 2025), extra limits phase in.
• California does not allow the deduction, so the state return gets no matching amount.

When a rental counts as a trade or business

QBI comes only from a trade or business under § 162. The Form 8995 instructions (2025) describe the test this way: an activity qualifies "if your primary purpose for engaging in the activity is for income or profit and you're involved in the activity with continuity and regularity." They add that "the ownership and rental of real property may constitute a trade or business if it meets the standard described above."

Two points from the same instructions matter for landlords:

• "Material participation under section 469 isn't required to qualify for the QBI deduction." The passive loss rules and the QBI rules use different tests. See passive loss rules for rental property.
• "Rental real estate that doesn't meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it's a section 162 trade or business."

Whether a particular rental meets the § 162 standard depends on the facts. That is a judgment call for your tax professional.

The Rev. Proc. 2019-38 safe harbor

The IRS safe harbor applies to tax years ending after December 31, 2017, and "the determination to use this safe harbor must be made annually." Each year you rely on it, all four requirements in § 3.03 must be met.

What counts toward the 250 hours

Rev. Proc. 2019-38 § 3.04 lists rental services: advertising, negotiating and executing leases, verifying tenant applications, rent collection, daily operation, maintenance and repair, management, and supervising employees and contractors. These may be performed by owners or by "employees, agents, and/or independent contractors of the owners," so a property manager's hours can count. For employees or contractors, a description of the services, the time generally spent, and time, wage or payment records will do.

These do not count: "financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; improving property under § 1.263(a)-3(d); or hours spent traveling to and from the real estate."

What is excluded from the safe harbor

Under § 3.05, the safe harbor is not available for:

• real estate you use as a residence under § 280A(d), the 14-day / 10% personal-use test described in the Schedule E walkthrough;
• property under a triple net lease, meaning a lease requiring the tenant "to pay taxes, fees, and insurance, and to pay for maintenance activities ... in addition to rent and utilities";
• property rented to a commonly controlled trade or business; and
• interests related to a specified service trade or business.

Residential and commercial properties can't be combined into one enterprise, though mixed-use property may be treated as one enterprise (§ 3.02). Failing the safe harbor is not fatal: it "does not preclude a taxpayer or the Service from otherwise establishing that an interest in rental real estate is a trade or business" (§ 3.01).

Thresholds, forms and the 2026 changes

Taxable income before the QBI deduction decides which form you use and whether extra limits apply. Above the threshold, wage and property limits and the rules for specified service businesses phase in.

For 2025 returns, you use Form 8995 if you have QBI and your taxable income before the QBI deduction is at or below $394,600 (married filing jointly) or $197,300 (other returns). "Otherwise, use Form 8995-A." If you rely on the safe harbor, enter each enterprise as identified on your statement, for example "Enterprise 1."

Changes in the 2025 law (OBBBA § 70105) for tax years beginning after 2025:

• Permanent. The old sunset after 2025 was replaced.
• Same rate. The deduction stays at 20%.
• Wider phase-in range. The range grows from $50,000 to $75,000, and from $100,000 to $150,000 for joint returns.
• A $400 minimum deduction for a taxpayer with at least $1,000 of QBI from "active" trades or businesses, meaning ones in which the taxpayer materially participates. Many owners who leave day-to-day work to a manager do not materially participate, so do not assume the minimum applies to your rental. Both amounts are indexed after 2026; the indexed figures are not yet published.

California differences

California does not conform to § 199A. The FTB says California "does not conform, under the PITL, to the federal deduction for qualified business income of pass-through entities under IRC section 199A" (R&TC § 17201.6). Rental income that qualifies for the federal deduction gets no matching deduction on the California return, whether you file Form 540 as a resident or Form 540NR as a nonresident. For other gaps between the two systems, see California vs. federal rental tax rules.

What to do next

1. Decide with your tax professional whether each rental is a § 162 trade or business, and whether you will use the safe harbor for the year.
2. Set up separate books for each rental enterprise if you have not already.
3. Keep a dated log of rental services: hours, what was done, the date and who did it. Ask your property manager what service records it can provide.
4. Check whether any property is under a triple net lease or used by you as a residence under the 14-day / 10% test.
5. Plan for the annual statement, which must be attached to a timely filed original return.
6. Run your rental's income and costs through the rental cash flow calculator, and see Schedule E for where rental income is reported.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Frequently asked questions

Do I need to materially participate to get the QBI deduction on rental income?

No, not for the regular deduction. The Form 8995 instructions (2025) say material participation under § 469 isn't required; what matters is whether the rental is a § 162 trade or business or meets the Rev. Proc. 2019-38 safe harbor. Material participation does matter for the new $400 minimum deduction that starts with tax years beginning after 2025.

Can my property manager's hours count toward the 250 hours?

Yes. Rev. Proc. 2019-38 lets rental services be performed by owners or by their employees, agents or independent contractors. For a contractor such as a manager, a description of the services, the time generally spent, and time or payment records will do. Hours spent on financing, reviewing financial reports, improving the property or traveling to it do not count.

Does a triple net lease qualify for the safe harbor?

No. Rev. Proc. 2019-38 excludes property under a triple net lease, defined as one requiring the tenant to pay taxes, fees, insurance and maintenance in addition to rent and utilities. That property may still qualify under the general § 162 trade-or-business standard, which is a question for your tax professional.

Was the QBI deduction supposed to end after 2025?

Before the 2025 law, § 199A did not apply to tax years beginning after December 31, 2025. OBBBA § 70105 replaced that sunset, so the deduction is permanent under current law. The rate stays at 20%; a figure of 23% was a proposal, not the enacted law.

Does California allow the QBI deduction?

No. California does not conform to § 199A, so there is no QBI deduction on a California return. Rental income that qualifies for the federal deduction gets no matching deduction for California.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

Sources

• IRC § 199A (opens in a new tab)
• Rev. Proc. 2019-38 (opens in a new tab)
• Instructions for Form 8995 (2025) (opens in a new tab)
• Rev. Proc. 2024-40 (opens in a new tab)
• Rev. Proc. 2025-32 (opens in a new tab)
• FTB, Summary of Federal Income Tax Changes (opens in a new tab)

Verified October 19, 2026.