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Not All Rental Income In Controlled Group Qualifies as QBI

Published on: 18:03PM Sep 12, 2018

We just got the following comment from a reader:

"Requesting comments on the safe harbor of controlled groups for QBI.  I rent half my owned farms from my wife who owns the other half.  From her rent she pays her mortgage, taxes, repairs etc. and shows the net rental income on her schedule E.  I of course file on schedule F . There are no threshold issues. Is this considered safe harbor for QBI?

Wind turbines are going up on these farms with yearly rental income.  Is this rental income considered QBI?"

This is a two-part question.  On the first part regarding the rent income received by the wife, this should qualify as QBI since she and her husband are part of the same controlled group (husband and wife are treated as one person for most tax laws).  Therefore, since they are under the threshold, we don't care about wages or qualified property, therefore, they will add their Schedule F income to the net rental income shown on Schedule E and take their 20% Section 199A deduction (plus or minus any cooperative distributions and limited by any taxable income constraints).

For the second part, this is likely not QBI.  The wind turbine rental income is received as part of a common controlled group, however, the actual income is not paid by any member of the controlled group.  In this case, since the income is essentially triple net with no services by the farmer or his wife, it is likely simply rental income and not available for the Section 199A deduction.  At least this is what the proposed regulations indicate at this time.  We will need to see the final regulations for the final answer.

Right now to qualify for the common control safe harbor on lease income, the rents must be paid by part of the common controlled group.  If it is paid by an outside party, that rental income will not qualify even though it was paid into the common group.