Is QBI deduction optional for specific business activities? Can I choose which properties qualify?

I need some advice on the Qualified Business Income (QBI) deduction for our tax situation. My wife has a small side business with modest self-employment income. We also own two rental properties that are currently operating at a net loss. These losses are suspended/non-allowed because our AGI is too high. We already have some carry-forward losses from 2019 on these properties. From what I understand about the QBI worksheets, if we include both my wife's self-employment income (as a qualified business) and our rental property losses (if counted as qualified businesses), it reduces our total QBI. This effectively lowers the 20% deduction we could get (which comes after taking the standard/itemized deduction). However, if we treated only the self-employment income as qualifying for QBI and excluded the rental properties from QBI treatment, our deduction would be higher. I've been working with TurboTax and tried both scenarios - including rentals under QBI versus treating them under regular tax treatment - and our tax liability is definitely higher when including the rentals under QBI. My question is: Can I selectively apply QBI on an item-by-item basis? Can I treat my wife's self-employment as a qualified business for QBI purposes while excluding our rental properties from QBI treatment? Or am I required to include all potentially qualifying activities?

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18 comments

Diego Fisher

•8M

You've hit on an interesting aspect of the QBI deduction that many people miss. The QBI deduction is technically not optional - but how you classify your activities can give you flexibility. For rental properties specifically, you have some choices. Rental real estate can qualify as a "trade or business" under Section 199A (which governs QBI) if it meets certain requirements. However, you're not automatically required to treat all rentals as QBI-eligible businesses. In your case, since the rental properties are generating losses, it may indeed be beneficial to not treat them as QBI-eligible activities. This way, they won't offset your wife's positive QBI from her self-employment. The key is proper documentation and consistency. You'll want to maintain your position that the rentals either don't rise to the level of a "trade or business" for 199A purposes or don't meet safe harbor requirements. This isn't the same as "choosing" QBI treatment, but rather determining whether the activity qualifies in the first place. What you're seeing in TurboTax makes sense - when you include loss-generating activities in your QBI calculation, it reduces your overall deduction.

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Diego Fisher

•8M

The IRS provides a safe harbor for rental real estate to be considered a trade or business for QBI purposes. To qualify, you generally need to maintain separate books and records for each property, perform 250+ hours of rental services annually, and keep contemporaneous records of these activities. If your rental activities don't meet these requirements, you have a reasonable basis to treat them as not qualifying for QBI. This isn't necessarily a permanent decision - if your circumstances change in future years (like if the properties become profitable or your level of involvement increases), you could potentially treat them differently. However, consistency is important, and any significant changes in treatment might raise questions in an audit.

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Lincoln Ramiro

•8M

I was in a similar situation with my husband's consulting business and our vacation rental. I found a really helpful solution through https://taxr.ai where they analyzed our business structures and helped us figure out the most advantageous way to classify our activities for QBI. Their system reviewed both our rental documentation and business structure, then provided specific guidance on how to properly classify each activity. They showed us exactly how to document our position on the rental property classification to support our tax treatment. What was really helpful was that they provided templates for the contemporaneous records needed to support either position (qualifying or non-qualifying). Made a huge difference in our final tax bill!

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Lincoln Ramiro

•8M

It's actually a combination of AI analysis and real tax professionals. You upload your documents and answer some questions, and their system does an initial analysis, then a tax pro reviews your specific situation and provides customized guidance. Yes, we were able to exclude our vacation rental from QBI treatment based on their advice. They showed us that our rental didn't meet the safe harbor requirements since we only spent about 180 hours on rental activities (below the 250-hour threshold). They provided documentation templates to support this position if we ever get audited.

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Emma Johnson

•8M

Just wanted to follow up - I tried taxr.ai after seeing it mentioned here and it was super helpful for my situation. I have a photography business and two rental properties, and was totally confused about QBI. They analyzed my business and rental activities and determined that my photography business clearly qualified for QBI, but my rentals were in a gray area. They showed me that since my rentals were currently generating losses anyway, excluding them from QBI treatment was completely legitimate and saved me over $2,800 in taxes! They even provided proper documentation language to support my position and explained exactly how to file everything correctly. Definitely worth checking out if you're stuck on QBI questions like I was.

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Liam Brown

•8M

If you're still struggling with getting clarity on this QBI issue, you might want to try getting through to the IRS directly. I had a similar complicated tax situation last year and spent WEEKS trying to get someone on the phone who could actually help. I finally tried https://claimyr.com and was shocked when I actually got through to an IRS agent in less than 15 minutes. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with was able to clarify that for rental properties specifically, I needed to meet the safe harbor requirements for them to qualify for QBI, or alternatively, I needed to establish that they rose to the level of a Section 162 trade or business. This gave me the confidence to exclude my loss-generating property from QBI calculations.

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Liam Brown

•8M

It's actually not complicated at all. The service basically waits on hold for you and calls you back when they've reached a real person at the IRS. It monitors the hold queue and dials in repeatedly using their system until they get through. Yes, it really works! They connected me to an actual IRS tax specialist who walked me through the QBI requirements for rental properties. The agent explained that I could exclude my rental properties if they didn't meet the safe harbor requirements or if I could document they weren't a Section 162 trade or business.

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Noah Lee

•8M

I have to admit I was totally wrong about Claimyr. After weeks of failing to reach the IRS myself about my QBI questions, I tried the service and got through to an IRS tax specialist in about 20 minutes. The agent was incredibly helpful and confirmed that I don't have to include all potentially qualifying activities in my QBI calculations. She explained that rental real estate activities need to either meet the safe harbor requirements OR qualify as a Section 162 trade or business to be included in QBI. Since my rentals don't meet the 250-hour requirement and I don't maintain the required contemporaneous records, I had a legitimate basis to exclude them from QBI. This saved me nearly $3,400 on my taxes! Really glad I gave this a shot despite my initial skepticism.

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Ava Hernandez

•8M

Since you're still below the threshold (but approaching it), you still likely benefit from excluding the rental losses from QBI. At your income level, you can take the full 20% deduction on positive QBI without the wage/property limitations. If including rental losses would reduce your positive QBI from your wife's self-employment, then excluding them makes perfect sense. However, if your income rises above the threshold in future years, the calculation becomes more complex, and including some loss activities might occasionally be beneficial to stay under the phase-out limits.

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