Section 199A Deduction for Real Estate Investors

Rental income qualifies for the 20% Section 199A deduction, also called the qualified business income (QBI) deduction, only if your rental activity counts as a trade or business, either on its facts or under the IRS's 250-hour safe harbor in Revenue Procedure 2019-38. Ordinary dividends from real estate investment trusts (REITs) qualify without that test. For 2026, no wage or property limit applies if your taxable income is $201,750 or less ($403,500 for married couples filing jointly); above that, a cap based on wages paid and property cost phases in. The 2025 tax law known as the One Big Beautiful Bill Act made the deduction permanent.

When does rental income count as qualified business income?

For a rental, QBI is its net profit: rent minus expenses such as mortgage interest, repairs, insurance, and depreciation. A rental produces QBI in one of three ways:

1. It is a trade or business on its facts. Courts look for activity that is regular, continuous, and considerable. The IRS has set no bright-line test, but the preamble to its final regulations lists relevant factors: whether the property is residential or commercial, how many properties you rent, how involved you or your agents are day to day, what services come with the lease, and the lease terms, such as a net lease versus a traditional lease. You do not have to meet the passive activity "material participation" tests.
2. It meets the 250-hour safe harbor, explained in the next section.
3. You rent it to a business you commonly control. If you rent a building you own to your own S corporation, for example, the rental counts as a trade or business for this deduction even if it would not qualify on its own.

A rental that shows a tax loss produces negative QBI. It reduces QBI from your other qualified businesses, and a net QBI loss for the year carries forward to reduce next year's QBI. Rental losses suspended under the passive loss rules count toward QBI only in the year they are finally allowed; how the passive loss rules work covers when suspended losses are released.

How does the 250-hour safe harbor work?

Under Revenue Procedure 2019-38, a "rental real estate enterprise," meaning either a single property or all of your similar properties combined, is treated as a trade or business for this deduction in any year you meet four requirements:

1. Separate books and records for each enterprise. With several properties in one enterprise, you can keep an income and expense statement for each property and consolidate them.
2. At least 250 hours of rental services a year. Once an enterprise has existed for 4 years or more, it needs 250 hours in any 3 of the 5 years ending with the current year.
3. Contemporaneous records, such as time logs, showing the hours, a description of the services, the dates, and who did the work. For employees or contractors, a description of their services, the time they generally spend on the enterprise, and their time or payment records will do.
4. A statement attached to your timely filed original return listing each property's address and rental category (residential or commercial), any properties bought or sold during the year, and a representation that you met the requirements.

Hours count no matter who does the work: you, your employees, agents such as a property manager, or independent contractors. Rental services include advertising, negotiating and signing leases, checking tenant applications, collecting rent, daily operation, maintenance and repairs (including buying supplies), managing the property, and supervising employees and contractors. Arranging financing, shopping for properties, reviewing financial statements, work on improvements you must capitalize, and travel to and from the property do not count.

Combining properties pools their hours, but residential and commercial properties cannot be combined, and once you combine, similar properties you buy later join the group for as long as you use the safe harbor. You can own the properties directly or through a single-member LLC that is disregarded for tax purposes, and a partnership or S corporation that owns rentals can use the safe harbor itself. LLC tax benefits for real estate investors explains how the ownership structure affects your return.

Three kinds of property cannot use the safe harbor:

• A property you use as a home during the year, meaning personal use of more than 14 days or more than 10% of the days it is rented at a fair price, whichever is greater.
• Property rented under a triple net lease, where the tenant pays taxes, fees, insurance, and maintenance on top of rent and utilities.
• Property rented to a business you commonly control, which already qualifies under the rule above.

Missing the safe harbor does not rule out the deduction if the rental is a trade or business under the factors above.

What are the 2026 income limits?

Your deduction is the smaller of two amounts: 20% of your QBI plus 20% of your qualified REIT dividends, or 20% of your taxable income after subtracting net capital gain (your long-term capital gains and qualified dividends). Starting in 2026, the deduction is at least $400 if you have $1,000 or more of QBI from businesses in which you materially participate, for example by working in them more than 500 hours during the year. A second limit, based on wages and property, depends on your 2026 taxable income before this deduction:

Between the two amounts, the limit phases in gradually. Starting in 2026, the 2025 law widened that phase-in range to $75,000 ($150,000 for joint returns), up from $50,000 and $100,000.

The limit caps the deduction for each rental business at the greater of 50% of the W-2 wages it paid, or 25% of those wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of its qualified property. W-2 wages are pay to the business's own employees; fees paid to a management company or independent contractors do not count, so a landlord with no employees relies on the 2.5% property test. UBIA is generally your cost basis in the building and other depreciable property, but not land, on the day you placed it in service, before any depreciation. A building counts only if your rental business still holds it at the end of the year, and only until the later of 10 years after you placed it in service or the last full year of its recovery period, which is 27.5 years for a residential rental.

Example for a single filer with 2026 taxable income of $320,000, above the $276,750 level where the limit applies in full, $40,000 of rental QBI, no W-2 wages, and $500,000 of building UBIA:

1. 20% of QBI: $40,000 x 20% = $8,000.
2. Property limit: $500,000 x 2.5% = $12,500.
3. Deduction: the smaller amount, $8,000. In the 35% bracket, that cuts federal tax by $2,800.

With $250,000 of building UBIA, the deduction would be the $6,250 limit.

Renting real estate is not one of the specified service businesses, such as health, law, accounting, and consulting, whose deduction phases out entirely at high incomes. The exception is a rental to a service business with 50% or more common ownership, such as a building you rent to your own medical or law practice. For the common owners, that rental is treated as a separate specified service business, so it gets no deduction once taxable income passes the top of the phase-in range ($276,750 for single filers and $553,500 for joint filers in 2026).

How do REIT dividends qualify?

Qualified REIT dividends get the 20% deduction at any income level, with no trade or business test, no safe harbor, and no wage or property limit. They are the ordinary REIT dividends reported in box 5 of Form 1099-DIV; capital gain dividends and qualified dividend income from a REIT do not count. A mutual fund or ETF that holds REITs can pass the same treatment through to you by reporting section 199A dividends.

Two conditions apply. You must hold the shares more than 45 days during the 91-day period that begins 45 days before the ex-dividend date (the first day the shares trade without the upcoming dividend). And the REIT amount still counts toward the overall cap based on taxable income. For example, $5,000 in box 5 produces a $1,000 deduction, worth $240 in the 24% bracket. How REIT dividends are taxed covers the other parts of a REIT's distributions.

How do you claim the deduction?

Use Form 8995 if your taxable income before the deduction is at or below your threshold, or Form 8995-A if it is higher. The deduction goes on line 13a of the 2025 Form 1040, and you can take it whether you itemize or claim the standard deduction. If you rely on the safe harbor, list each rental enterprise on the form the same way it appears on your safe harbor statement.

For how this deduction fits with depreciation, expense timing, and sale planning, see tax planning strategies for rental property income.