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February 24, 2024 | read

When Rentals Qualify as a Business

Brandon Hall

When Rentals Qualify as a Business

Business owners make a profit by actively managing their business. Passive investors make money when their assets increase in value as they don’t actively manage their holdings.

As a landlord, you want your rentals to qualify as a business, especially with the 2018 IRC Sec. 199A pass-through deduction. While qualifying as a passive investor still affords you similar tax benefits, you will also lose valuable tax deductions!

Landlords owning rental property will qualify as a business owner if they do it to earn a profit and work at it regularly, systematically, and continuously. (Alvary v. United States, 302 F.2d 790 (2d Cir. 1962).)

Landlords do not have to do all the work themselves as they can hire and manage property managers and contractors but still be engaged in rentals to earn a profit (Gilford v. Comm’r., 201 F.2d 735 (2d Cir. 1953)).

Additionally, if a landlord’s rental unit is vacant it doesn’t necessarily preclude them from qualify as a business owner as long as the rental unit was marketed for rent (Jephson v. Comm’r, 37 B.T.A. 1117 (1938)).

In Murtaugh v. Comm’r., T.C. Memo 1997-319 it was found that the taxpayers only had a 25% stake in a timeshare unit and were still able to qualify as business owners. Additionally, in Balsamo v. Comm’r., T.C. Memo 1987-477 it was established as a general rule that owning only one rental property and qualify as a business operation. So you don’t need an expansive portfolio in order to qualify as a business.

See How to Prove Your Business is “For Profit” for more information.

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