What changed
Under the Tax Cuts and Jobs Act of 2017, the Section 199A deduction — a 20% deduction on qualified business income (QBI) from pass-through entities — was set to expire after December 31, 2025. Real estate investors holding rentals in LLCs, partnerships, or S-corps were facing the complete elimination of this deduction starting in tax year 2026.
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made Section 199A permanent — removing the expiration date entirely. The OBBBA also made two enhancements effective for tax years beginning in 2026. First, the phase-in range for the W-2 wage and qualified property (UBIA) limitation was widened: from $50,000 / $100,000 (married filing jointly) to $75,000 / $150,000 (MFJ), indexed for inflation after 2026. This is the income band above the threshold in which the wage/capital test gradually phases in, so the wider range gives higher-income investors more room before the limitation fully applies.
Second, a new minimum QBI deduction of $400 was created for taxpayers with at least $1,000 of qualified business income from an active qualified trade or business (both amounts indexed for inflation after 2026). Sources: Tax Foundation analysis of the OBBBA; Anchin LLP, Real Estate: One Big Beautiful Bill and Tax Changes.
Why it matters to investors
The permanence removes a major planning uncertainty. Investors who were considering selling or restructuring holdings before the 2025 expiration no longer face that cliff. For a rental owner in the 37% bracket with $100,000 of qualifying QBI, the 20% deduction reduces taxable income by $20,000 — potentially worth up to $7,400 in annual federal tax savings — and that benefit now continues indefinitely.
For rental income to qualify, the activity must rise to the level of a trade or business under Section 162. IRS Notice 2019-07 provides a safe harbor: a rental enterprise that performs 250 or more hours of rental services per year (by the owner, employees, and agents combined), with contemporaneous records, qualifies. Single-family and multi-family rentals managed with active involvement typically meet the test; triple-net-lease commercial properties generally do not.
The UBIA test is especially favorable for real estate above the income phase-in threshold, where a wage test would otherwise bite investors without employees. The alternative limitation is: 25% of W-2 wages plus 2.5% of the Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property. A rental property with $1,000,000 of UBIA generates a $25,000 UBIA allowance even with zero employees — and for a portfolio of properties, these allowances stack. This makes the Section 199A deduction particularly valuable for capital-intensive real estate investors.
REIT investors benefit as well: qualified REIT dividends qualify for the 20% deduction with no W-2 wage or UBIA limitation, providing a capital-efficient path to the deduction for investors who prefer passive funds over direct ownership.
What to do
If your rentals already qualified under the 250-hour safe harbor or the Section 162 test, the permanence means you can plan around this deduction indefinitely. Review your structure to ensure nothing has changed that would disqualify you.
Documentation is the most common failure point. The 250-hour safe harbor requires contemporaneous records — a log maintained as you go, not reconstructed at tax time. IRS Notice 2019-07 specifies what records must show: dates, hours, description of services, and who performed them. Without these, the safe harbor is unavailable on audit even if you actually performed the hours.
If your income is above the phase-in threshold, run the UBIA calculation alongside the 50%-of-wages test. For real estate investors, the capital-intensive formula frequently produces a larger allowable deduction than the wage-only test. Confirm with your CPA which formula applies and whether a cost segregation study would increase your UBIA-based allowance on recently acquired properties.
Educational context only. Tax rules vary by situation; consult a qualified tax professional before acting. Sources: Tax Foundation; Anchin LLP.
Frequently asked questions
Does all rental income automatically qualify for the Section 199A deduction?
No. Rental income must qualify as a 'trade or business.' IRS Notice 2019-07 provides a safe harbor: 250+ hours of rental services per year with contemporaneous records. Triple-net-lease commercial properties generally don't qualify. Active residential rentals typically do, but contemporaneous documentation is required — records reconstructed at tax time will not satisfy the safe harbor on audit.
How does the UBIA test help real estate investors above the income threshold?
Above the income phase-in threshold, the Section 199A deduction is limited to the greater of: (a) 50% of W-2 wages paid, or (b) 25% of W-2 wages + 2.5% of UBIA (Unadjusted Basis Immediately After Acquisition) of qualified property. Since real estate has high UBIA equal to the purchase price (before depreciation), capital-intensive investors with large holdings can often claim a meaningful deduction even with few or no employees. Each property's UBIA is calculated at the date of purchase and is not reduced by depreciation over time.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.