If you’re a triple net lease investor, you may be wondering if you qualify for business income deductions. Many triple net lease investors have this question since they want to take advantage of the incentive if they are eligible.
But before going into the details, let’s take a look at a triple net lease investor:
A triple net lease investor is an individual or company that invests in properties with a triple net lease agreement (NNN lease). This lease agreement requires the tenant to pay for property-related expenses, including property taxes, insurance, and maintenance.
Now, let’s see who is covered by Qualified Business Income (QBI) deductions.
QBI Deductions: Who Is Covered?
The Qualified Business Income deduction or QBI deduction is a new tax break created as part of the Tax Cuts and Jobs Act. The deduction allows businesses to reduce their qualified business income by 20 percent. The QBI deduction is available to individuals, estates, and trusts.
The QBI deduction is available for qualified business income from:
- Sole proprietorships
- Partnerships (including LLCs that are taxed as partnerships)
- Real estate investment trusts (REITs)
- Qualified cooperative organizations
To be eligible for the deduction, you must have taxable income that is less than $157,500 if you are single or $315,000 if you are married filing jointly. The deduction may be limited if your taxable income is above these thresholds.
The QBI deduction is available for tax years 2018 through 2025. After 2025, the deduction will revert to its pre-tax cut levels unless Congress takes action to extend it.
Triple Net Lease Investors Do Not Qualify as a Trade or Business
The IRS has ruled that triple net lease investments are not considered a trade or business because the investor only rents property to a tenant and does not provide any tenant services.
The IRS has also ruled that triple net lease investors are not eligible for the passive activity loss rules because they are not actively engaged in managing the property.
However, There Are Other Triple Net Lease Tax Advantages
Since triple net lease investors do not qualify for QBI deductions, they can consider other tax incentives. One such way is by investing in places where there is no state income tax.
Triple net lease investors could save money if they invest in the following states:
- South Dakota
Aside from income tax, these states also do not collect state capital gains tax. Triple net lease investors can also consider New Hampshire since it plans to phase out investment interest and income taxes in 2023.
Deferred Capital Gains Taxes
The most common deduction that triple net lease investors can claim is a deferred capital gains tax. This deduction allows investors to defer paying taxes on any capital gains generated by the sale of a property. To qualify for this deduction, the investor must reinvest the proceeds from the sale into another similar property. The reinvestment must be made within a certain time frame, and the investor must also hold the new property for a certain period of time.
Cost Segregation Depreciation
Cost segregation depreciation is a way for business owners to get extra tax deductions on their income taxes. It works by breaking down the cost of the property into different categories, such as land, building, and equipment. Each category can then be depreciated over a different number of years, resulting in a larger tax deduction. This is especially beneficial for businesses with a lot of equipment since they can depreciate the equipment much faster than the land or building.
The Bottom Line – Triple Net Lease Investors Do Not Qualify for QBI Deductions
Triple net lease investors do not qualify as a business to take advantage of QBI deductions – but they have other options to allow them to save money on the taxes they have to pay.
If you want to know more about these options, contact Brisky Net Lease today to help you!