Is Schedule E rental income eligible for the 20% pass-through deduction? Final regulations provide limited guidance, but IRS gives a safe harbor. The new tax break applies to qualified business income from a trade or business. The final regs continue to refer to the standard under federal tax code Section 162, the statute that generally governs the deductibility of trade or business expenses. Unfortunately, this standard is somewhat unclear in the context of a rental activity. That’s because it’s based on facts and circumstances specific to each taxpayer. Among the relevant factors: Type of property leased (commercial or residential), extent of day-to-day involvement by the lessor or the lessor’s agents, lease terms, number of properties rented and other ancillary services provided under the lease. The safe harbor applies if at least 250 hours are devoted to the rental activity by the property owner, employees or independent contractors in a year. Time spent on repairs, collecting rent, negotiating leases and providing tenant services counts. Hours put in for arranging financing, constructing long-term capital improvements, and driving to and from the real estate aren’t included in the 250-hour standard. If the 250-hour test is met, you can treat the rental as a trade or business for purposes of the 20% pass-through deduction. Separate records and bank accounts must be maintained. For post-2018 years, contemporaneous records must be kept that detail the hours, dates and description of the services, and who performed them. The safe harbor doesn’t apply to property that is leased under a triple net lease or used as a residence for any part of the year by the lessor or the lessor’s family. Notice 2019-07 has details on the safe harbor, including how to claim it.