What Is the QBI Deduction for Rental Property? The §199A Deduction Explained

The Tax Cuts and Jobs Act (2017) created the §199A qualified business income (QBI) deduction for pass-through entities — sole proprietorships, partnerships, S-corps, and LLCs taxed as pass-throughs. The deduction is generally 20% of qualified business income, subject to limitations.

Does Rental Income Qualify as QBI?

This is where it gets complicated. The QBI deduction applies to income from a "qualified trade or business" under §162. Passive rental activities generally do not constitute a trade or business under §162 — they're investments, not businesses. However, activities that rise to the level of a business (significant services, active management, short-term rentals) may qualify.

For STR investors: because the STR tax loophole treats the rental activity as a non-passive trade or business activity, many practitioners argue that it simultaneously qualifies as a §162 trade or business for QBI purposes. There's also IRS Revenue Procedure 2019-38, which provides a safe harbor for certain rental real estate to qualify as a §162 trade or business for QBI deduction purposes.

The Income Limitations

Below the threshold income ($197,300 single / $394,600 married filing jointly for 2025), the QBI deduction is straightforwardly 20% of QBI. Above these thresholds, the deduction begins to phase in W-2 wage and qualified property limitations that can reduce the deduction significantly for capital-intensive businesses with few employees.

For high-income STR investors (above the threshold), the deduction is limited to the greater of: (1) 50% of W-2 wages paid by the business, or (2) 25% of W-2 wages + 2.5% of the unadjusted basis of qualified property. Since most individual STR operators pay no W-2 wages, the qualified property limitation (2.5% of property basis) often applies.

Interaction with Cost Segregation

Cost segregation reduces QBI (because depreciation deductions reduce net income). For investors in the phase-in range or who rely on the W-2/property limitation, a large depreciation deduction from cost segregation might reduce QBI to near zero in year one — eliminating the QBI deduction in that year. This is a planning consideration, not a reason to avoid cost segregation: the depreciation savings typically dwarf any QBI deduction lost.