David Moore of Equity Advantage 1031 Exchange and CPA Jonathan McGuire of Aldrich Advisors explain the permanent QBI deduction and what it means for real estate owners, rentals, and small business operators.
Why the permanent QBI deduction matters
The permanent extension of the Qualified Business Income (QBI) deduction is one of the most important tax developments for small businesses and real estate investors in recent years. As David Moore and Jonathan McGuire explain, eligible taxpayers may deduct up to 20 percent of their qualified business income before calculating tax liability. That 20 percent headline is easy to state, but the rules that determine who actually gets it are detailed and consequential.
QBI basics – what is being deducted?
“You get a 20% deduction on what we call qualified business income.” – Jonathan McGuire
Qualified Business Income generally includes ordinary business income from pass-through entities such as partnerships, LLCs, and S corporations. Rental income can qualify when the rental activity is run as a trade or business. That means how you operate and document rentals matters. Passive, investment-only rentals may not qualify.
Key elements that affect QBI eligibility
- Trade or business classification: The activity must be a trade or business. This is fact specific and requires documentation and intent.
- Type of income: QBI applies to ordinary business income, not capital gains, dividends, or certain investment items.
- Specified service trades or businesses (SSTBs): High-income taxpayers in certain professions may face limits. Rentals are usually not SSTBs, but service-heavy arrangements need review.
Limits and phase-ins – W-2 wages and qualified property
The 20 percent number is subject to important limits. Two technical but practical constraints are:
- W-2 wages test: The deduction may be limited based on the amount of W-2 wages the business pays. This can create legitimate planning opportunities around payroll and entity structure.
- Qualified property test: A portion of the limitation depends on the unadjusted basis immediately after acquisition (UBIA) of qualified property used in the business. Ownership of depreciable tangible property matters.
As McGuire explains, the deduction is calculated “based upon the amount of W-2 wages you pay employees, based upon the amount of property that you own.”
Illustrative example
Suppose a rental or small business generates $100,000 of qualifying net income. Under the 20 percent rule, the potential deduction would be $20,000. That deduction reduces taxable income and can materially lower taxes owed. Real-world results will vary, because limits based on wages, qualified property, and overall taxable income can reduce or eliminate the deduction.
Real estate-specific considerations
- Rental treated as trade or business: Active documentation of hours, services, tenant relations, and management can help show the rental rises to a trade or business.
- Interaction with 1031 Exchange: A 1031 Exchange defers capital gains on exchanged investment real estate. The Exchange can work together with QBI planning: the Exchange defers gains while QBI can lower current taxes on operating income.
- Entity and payroll planning: Because W-2 wages affect limits, entity choice and payroll practices may change QBI outcomes.
Practical tax planning moves
- Document your business activity thoroughly to support trade or business status.
- Review entity structure with a CPA to optimize for QBI and other tax goals.
- Consider legitimate payroll strategies that reflect real compensation.
- Coordinate 1031 Exchange timing with expected operating income and QBI planning.
- Engage tax professionals early to avoid costly mistakes.
Common pitfalls and cautions
Do not assume all rentals qualify for QBI. Avoid artificial payroll maneuvers that lack economic substance. Remember that capital gains are generally excluded from QBI, and tax law can change in the future. Work with trusted advisors to design defensible strategies.
Conclusion
The permanence of the QBI deduction changes long-term planning. A straightforward 20 percent deduction sounds simple, but capturing it depends on trade or business status, wages, qualified property, and the nature of income. Equity Advantage 1031 Exchange and Aldrich Advisors together show how combining 1031 Exchange strategies with proactive QBI planning can lower both current and deferred tax burdens.
For tailored guidance, contact Equity Advantage 1031 Exchange for Exchange strategy help and Aldrich Advisors for CPA-level tax planning.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
