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2023 Tax Planning Guide

Rental Real Estate Tax Benefits

House for rent label

Certain interests in rental real estate now qualify for the 20% pass-through income deduction. These enterprises are generally defined as owning real estate for purposes of generating rental income. To claim the deduction, you’ll need to meet these requirements:
  • Keep separate books showing income and expenses for each rental real estate enterprise.

  • Complete 250 hours or more of rental services each year if your rental real estate enterprise is less than four years old. For properties you've owned longer, 250 or more hours of rental services must have been performed in at least three of the past five years. Rental services include advertising the property for rent, collecting rent, and completing routine repairs or maintenance on the property.

  • Maintain meticulous records, including time logs for hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services. Attach this report to your tax return.

The formula to figure out your tax liability with the pass-through income provision is complex, so work with your tax professional, who can help you calculate your pass-through income and its tax.

The IRS now allows a pass-through entity tax (PTE tax) that would allow partnerships and S-corporations to pay state income taxes, without limitations, at the entity-level, rather than on the personal returns of the partners or owners. These taxes become deductible for the business, lowering taxable income.

About two-thirds of states have enacted or have pending PTE tax legislation. Some require an annual election to pay the tax, while others have irrevocable elections. While the PTE tax may be deductible for federal income tax purposes, states may have different rules. Be sure to chat with your tax professional to see if this work around makes sense for you and your business.


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