QBI for rentals: the 250-hour safe harbor (Rev. Proc. 2019-38)

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Rental income qualifies for the section 199A deduction only if the rental is a trade or business. Rev. Proc. 2019-38 offers a safe harbor: separate books, 250 or more hours of rental services a year, contemporaneous logs, and a statement on the return. Triple net leases and homes you use personally are excluded. Rentals that fail the safe harbor can still qualify on facts.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). Section 199A might also pay for a slice of your rental profit, by letting you deduct up to 20% of qualified business income (QBI). The catch: the income has to come from a trade or business, and a lot of passive landlording does not obviously qualify.

To reduce arguments, the IRS issued Rev. Proc. 2019-38, a safe harbor that treats a "rental real estate enterprise" as a trade or business for section 199A purposes if it meets specific hours and recordkeeping rules. As of Oct 2026, section 199A is permanent following the 2025 tax law (P.L. 119-21), per IRS guidance, so these rules matter for the long haul. For the deduction itself, see the QBI deduction guide.

CPA Warning Label: The 250 hours need contemporaneous time logs. A log reconstructed in April from memory and vibes is the kind the IRS enjoys reading out loud.

Is a rental a trade or business

Section 199A borrows the section 162 trade-or-business standard: the activity must be conducted with continuity and regularity, with the primary purpose of income or profit. There is no bright line. Courts have looked at factors like the number of properties, the type of lease, the owner's day-to-day involvement, and whether the owner (or agents) provides services.

The final regulations add a rule that helps some landlords: renting property to a commonly controlled trade or business (a self-rental) is treated as a trade or business for 199A (Treas. Reg. 1.199A-1(b)(14)). See self-rental rules.

Rentals that are generally weak candidates on the facts: a single net-leased property where the tenant handles everything, or vacant land leased for a billboard. Rentals that are generally stronger candidates: a portfolio of residential units where the owner or a manager advertises, screens tenants, collects rent and handles repairs year-round.

If you are unsure, the safe harbor is a way to buy certainty. Failing the safe harbor does not mean you fail; it means you are back to the facts-and-circumstances test.

250-hour safe harbor

Under Rev. Proc. 2019-38, a rental real estate enterprise is treated as a trade or business for section 199A if all of these are met:

1. Separate books and records are maintained for each enterprise (separate bank accounts are not strictly required, but they help).
2. 250 or more hours of rental services are performed each year for enterprises in existence fewer than four years. For enterprises in existence at least four years, 250 hours in any three of the five consecutive years ending with the current year.
3. Contemporaneous records for tax years beginning after Dec. 31, 2018, including hours, a description of services, dates, and who performed them.
4. A signed statement attached to the return for each year the safe harbor is used, stating that the requirements are met.

An "enterprise" is either one property or a group of similar properties (all residential or all commercial; mixing the two in one enterprise is not allowed, except for mixed-use buildings treated as a single property). Once you treat properties as a single enterprise you generally must keep doing so, unless facts change significantly.

What counts as rental services

Hours by owners, employees, agents or independent contractors all count. Included: advertising to rent, negotiating and executing leases, verifying tenant applications, collecting rent, daily operation, maintenance and repair, management, purchasing materials, and supervising employees and contractors.

Not included: financial or investment management (arranging financing, procuring property, reviewing financial statements), planning or managing capital improvements, and hours traveling to and from the property. So the property manager's leasing agent counts; your three-hour drive to look at the roof does not.

Records needed

The safe harbor is mostly a recordkeeping test with a 250-hour threshold attached. What a reasonable file contains:

• A time log for each person who performs services, with date, hours, property and task. A calendar export or a spreadsheet updated weekly is fine; a log written once a year is not contemporaneous.
• For third-party managers: statements or reports showing hours spent. Many managers do not track hours, so ask in writing at the start of the year. If they will not provide them, you may need to rely on facts and circumstances instead.
• Invoices from contractors that describe the work and time spent.
• The separate profit and loss statement for each enterprise.
• A copy of the safe harbor statement you attach to the return.

Hours for maintenance contractors often get a portfolio over the line. A handyman visit for a leaking faucet counts. The contractor replacing every window as a capital improvement does not, because capital improvement work is excluded. See rental bookkeeping systems.

Excluded property

Some rentals cannot use the safe harbor at all:

• Property used as a residence by the taxpayer for any part of the year under section 280A, which knocks out most vacation homes you also use. See vacation home rental rules.
• Triple net leases, where the tenant pays taxes, fees, insurance and maintenance in addition to rent. See QBI and triple net leases.
• Self-rentals to a trade or business you commonly control (these already qualify under the regulations, so the exclusion is not a penalty).
• Property leased under an arrangement that the regulations treat as part of a specified service trade or business.

Exclusion from the safe harbor is not a disqualification from 199A. A triple net property in a large, actively managed commercial portfolio can still be a trade or business on the facts. It is just harder to prove.

QBI deduction value

The deduction is generally 20% of QBI, limited to 20% of taxable income minus net capital gain. For taxpayers with 2026 taxable income above the threshold, the deduction also becomes limited by the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.

For 2026, Rev. Proc. 2025-32 sets the threshold at $201,750 ($403,500 for joint returns), with the limitation phasing in over the next $75,000 ($150,000 joint). Rental real estate is not a specified service trade or business, so the SSTB rules do not apply. The 2.5% UBIA prong helps landlords: a $1,000,000 depreciable building gives $25,000 of UBIA capacity even with no employees. 2027 thresholds had not been published by the IRS as of Oct 2026.

The new minimum deduction

For tax years beginning after Dec. 31, 2025, the 2025 law added a $400 minimum QBI deduction for taxpayers with at least $1,000 of QBI from active trades or businesses in which they materially participate, per Rev. Proc. 2025-32 (both amounts are indexed after 2026). Most passive landlords who rely on a property manager will not meet material participation, so this floor will matter mainly to hands-on owners with small profits.

Losses and aggregation

Rental QBI is netted with QBI from other businesses on Form 8995 or 8995-A. If you have multiple rental enterprises, a loss in one reduces QBI from the others. Aggregation under Treas. Reg. 1.199A-4 (a separate concept from the safe harbor enterprise) can combine businesses for the W-2 wage and UBIA limits if they share common ownership and meet the integration factors.

Illustration: Fran owns six single-family rentals she treats as one residential enterprise. Assumptions: married filing jointly, 2026 taxable income $180,000 before the QBI deduction (below the threshold), net rental income after depreciation $30,000, no capital gains. Her property manager logs 210 hours of leasing, rent collection and maintenance coordination; contractors log 70 hours of repairs; Fran logs 25 hours approving leases and screening applicants. Total: 305 hours, so she meets the 250-hour test. QBI deduction: 20% of $30,000 = $6,000, below 20% of taxable income ($36,000). At a 22% marginal rate, that saves about $1,320 of federal tax. If her rentals had shown a net loss instead, the loss would be negative QBI that carries forward and reduces future QBI.