Tax pros: Should rental property losses with negative QBI be reported on Form 8995, even when it reduces client's Qualified Business Income deduction?

The way I approach this with my clients is to evaluate each rental activity individually rather than applying a blanket rule. The key question is whether the rental truly rises to the level of a Section 162 trade or business, not just whether the client is "involved." You're right that the bar for Section 162 is relatively low, but it does require "regular and continuous" activity. For clients who are truly engaged in the rental business (managing multiple properties, handling tenant issues directly, making regular repairs, etc.), I generally include the activity on Form 8995 whether it shows a profit or loss. The tax code doesn't give us the option to only report profitable QBI activities while ignoring losses. For "passive" rental owners who use management companies and have minimal involvement, I might take the position that the activity doesn't rise to Section 162 levels and therefore doesn't need to be reported on Form 8995 at all. Remember that rental losses often aren't "real" economic losses - they're frequently the result of depreciation. So while including the loss might reduce QBI in the current year, it could be the correct technical position.

I discovered an amazing tool that saved me hours of deliberation on this exact issue! I was struggling with the same QBI rental loss question for several clients and wasn't sure about the right approach. I tried https://taxr.ai and uploaded a sample return with rental activities showing losses. The AI analyzed my forms and previous treatment, then provided specific guidance for my situation. What impressed me was that it cited the relevant sections of the tax code AND recent tax court rulings on similar Section 162 qualification issues. It even gave me specific documentation recommendations to support my position if there was ever an audit. No more second-guessing whether I'm making the right call on Form 8995 treatment!

I'm back to report that I tried https://taxr.ai after my skeptical question above, and I have to admit I was impressed. I uploaded my client's Schedule E and some notes about their involvement level with their rental properties, and it gave me a nuanced analysis. For my particular case (client with 3 rental properties showing paper losses due to depreciation but positive cash flow), it recommended including the properties on Form 8995. But what really helped was the detailed explanation of why - it walked through the Section 162 factors and explained how my client's level of activity met the standard. The tool even suggested specific documentation I should keep in my files to support the position. I feel much more confident in my approach now and have a clear rationale I can explain to my client. Definitely worth checking out if you're dealing with these borderline QBI situations.

For anyone struggling with getting clarification directly from the IRS on QBI treatment of rental losses - I found an unexpected solution. After being on hold for 2+ hours multiple times trying to get through to an IRS representative who could address this specific issue, I tried https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. Their service got me connected to an actual IRS agent in about 20 minutes instead of the 3+ hour waits I was experiencing before. I was able to discuss multiple rental property QBI scenarios with the agent and get their guidance on Form 8995 reporting. Obviously the agent couldn't provide binding advice, but it was incredibly helpful to hear their perspective on how they're evaluating these situations during reviews.

I need to follow up on my skeptical comment above. After continuing to waste entire afternoons on hold with the IRS trying to get clarity on several complex QBI situations, I finally broke down and tried the Claimyr service. I was genuinely surprised when I got a call back in about 25 minutes connecting me to an actual IRS representative. The agent I spoke with was able to answer my questions about rental property treatment on Form 8995 and directed me to specific sections in Publication 535 I hadn't previously considered. While they emphasized they couldn't provide binding advice for specific taxpayer situations, the general guidance was extremely helpful. I still think the IRS needs to improve their staffing and accessibility, but in the meantime, this service saved me hours of frustration. For complex technical questions where written guidance is unclear, sometimes you just need to speak with someone at the IRS directly.

I think there's a practical middle ground here that I've been using with my rental property clients. Rather than making a blanket decision to include or exclude all rental activities from Form 8995, I evaluate them individually. For properties showing a true economic loss (negative cash flow even before depreciation), I generally include them on Form 8995 if the client's involvement meets Section 162 standards. However, for properties showing positive cash flow but a tax loss purely from depreciation, I sometimes take the position that these aren't "true" business losses that should offset other QBI. The regulations aren't crystal clear on this distinction, which gives us some reasonable basis for interpretation. Documentation of your reasoning is key.

Has anyone considered the aggregation election for rental properties? If your client has multiple rentals and some are profitable while others show losses, electing to aggregate them as a single business for QBI purposes might be beneficial. This way, you're properly reporting everything on Form 8995, but the losses and profits offset each other. The requirements for aggregation are in Reg. 1.199A-4, and you need to meet the 50% common ownership test, plus at least 2 of the 3 factors (similar businesses, shared resources, or interdependence). For many clients with multiple rentals in the same area, this might be a viable approach.

I've been following this discussion with great interest as I've encountered similar dilemmas with my rental property clients. One approach I've found helpful is creating a clear decision matrix for each client that documents the factors supporting Section 162 trade or business status. For each rental property, I evaluate: (1) hours per week spent on management activities, (2) whether they use a management company or handle operations directly, (3) frequency of tenant interactions, (4) involvement in maintenance and repairs, and (5) marketing efforts for vacant units. I document this analysis in the client file regardless of whether I ultimately include the activity on Form 8995. What's helped me sleep better at night is being consistent in my application of these criteria across all clients. If the facts support Section 162 treatment, I include the activity on Form 8995 whether it shows a profit or loss. The tax code doesn't give us the luxury of cherry-picking only profitable QBI activities. That said, I do make sure clients understand the impact on their current-year QBI deduction when rental losses are involved. Sometimes we discuss strategies like timing of repairs or equipment purchases to help manage the overall QBI picture across multiple business activities.