How, in a partnership, do you recognize one partner as having qualified business income and the other not? The situation is rental property.

[itonewbie · Accepted solution]

No, the determination of whether the rental property qualifies as a trade or business based on §162 or Notice 2019-07 safe harbor for the purpose of §199A is made a the RPE level.  Once that determination is made, you would allocate QBI for the rental to each partner like other QBI items.  It is not relevant whether it is a limited or general partner.

Perhaps I am not understanding your question correctly?

[beylal]

The property is farmland.  One partners rents from the partnership so it would be qualified income to him.  The other partner is not involved at all except to receive the rent.  Somehow I need to mark the one with no involvement as having no qualified business income.  The mechanics in ProSeries have not let me do that.

[TaxMonkey]

If the partnership is a trade or business, it is a trade or business for all partners regardless of their level of involvement.

[PhoebeRoberts]

The issue is that it's self-rental to one partner (and QBI by definition, despite not rising to the level of a ToB) and not to the others.

I don't know how to override PS to produce that result, though.

[TaxMonkey]

The statement that you made is inconsistent with the Treas Regulations.,  Trade or Business status is determined at the partnership level. If the partnership is engaged in a trade or business then all partners are. There is no way to produce the result you are looking for.

[PhoebeRoberts]

The rental is not a ToB, because otherwise this isn't an issue.

It is, however, self-rental to just one of the partners. It's by definition QBI to that one partner.

[TaxMonkey]

QBI to one QBI to all

[itonewbie]

IMHO, I'm not sure if the self-rental position would fly.  First, self-rental is not a free-for-all concept.  All the conditions under §1.199A-4(b) still need to be met.

The OP did not specify (among other requirements) whether the partnership and farm share common control - which I take that to mean that the farm-owning partner must also own 50% or more of the partnership.  Let's assume he does, it is still not clear that by virtue of the partner leasing the farm from partnership that it could meet 2 of the 3 facts and circumstances tests under §1.199A-4(b)(1)(v):

(A) The trades or businesses provide products, property, or services that are the same or customarily offered together.
(B) The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
(C) The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).

Second, whether the rental activity qualifies as a trade or business and eligible for QBI for purposes of §199A must be determined at the RPE level.  For a rental real estate enterprise that does not otherwise rise to the level of §162 trade or business, a decision must be made as to whether it qualifies for QBI under the safe harbor rule laid out in Notice 2019-07 or by aggregation pursuant to §1.199A-4(b).  That tax treatment made by the RPE is binding on all partners.  The only option accorded to each partner by §1.199A-4(b)(2) is to add to but not subtract from aggregation done at the RPE level and only with respect to trades or businesses.

In other words, this is a catch 22.  Unless the RPE elects to treat the self-rental as a trade or business for purposes of §199A, by either aggregation (assuming the conditions stipulated under §1.199A-4(b)(1)(v) could be met, about which I have my doubts) or the safe harbor rule per Notice 2019-07, which causes QBI with respect to the rental activity to pass through to both partners, the self-rental is ***not*** a trade or business.  The farm-owning partner cannot, therefore, aggregate the "self-rental" at his level with the partnership for purposes of QBI.

[TaxMonkey]

Excellent summary.  

[itonewbie]

Thanks! It's good to bounce off ideas.

[rgp44]

Have a very similar issue but i have to admit you lost me in your explanation.  My clients own 100% of a business in a strip mall, they own 51% of a partnership that owns the strip mall, passive investors own the other 49%.  Their operating business is about 60% of the revenue to the strip mall.  The mall tenants pay rent and taxes/insurance through CAM which i assume makes it triple net lease which would be excluded from trade/business safe harbor but it is a self-rental so is it then considered one for Sec 199A purposes?  Is the rental partnership income QBI for everyone, QBI just for my clients but not the passive investors, or is it not QBI at all?  appreciate any help you can lend,