Does the QBI (Section 199A) Deduction Apply to Syndication Income?
It can. Income from an apartment syndication counts as qualified business income (QBI) if the partnership's rental activity is a trade or business under section 162, or meets the IRS safe harbor in Revenue Procedure 2019-38, and that question is decided at the partnership level. If it counts, an eligible investor may deduct up to 20% of it, subject to income limits. In the early years of a deal, though, depreciation often turns rental income into a loss, and a QBI loss reduces future QBI instead of creating a deduction.
This post explains when the deduction applies, what Public Law 119-21 changed and where the numbers appear on your K-1. Rules are as of October 2026. Ask a tax professional how they apply to you.
What is the QBI deduction?
Section 199A lets eligible individuals, trusts and estates deduct up to 20% of their qualified business income from a qualified trade or business. The IRS's QBI page describes it as a deduction of up to 20 percent of QBI, plus 20 percent of qualified REIT dividends and qualified publicly traded partnership income.
QBI is the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. It does not include capital gains or losses, so the gain on selling the building is generally outside it. Distributions are not income at all, so they are not QBI either.
Is a syndication's rental income from a trade or business?
That is the key question, and it is answered for the partnership, not for you. The Form 8995 instructions say that if you own an interest in a pass-through entity, the trade or business determination is made at the entity level, and that material participation under section 469 is not required. A passive limited partner can therefore have QBI.
There are two ways for rental real estate to qualify:
- Section 162 trade or business. The instructions describe this as an activity whose primary purpose is income or profit, carried on with continuity and regularity. A professionally managed apartment building often fits, but it depends on the facts.
- The Rev. Proc. 2019-38 safe harbor. If its conditions are met, a rental real estate enterprise is treated as a single trade or business for section 199A. Partnerships may use it.
What does the Rev. Proc. 2019-38 safe harbor require?
Revenue Procedure 2019-38 lists the conditions, which must be met each year:
| Condition | What it requires |
|---|---|
| Separate books and records | Income and expenses kept for each rental real estate enterprise |
| 250 hours of rental services | 250 or more hours a year for an enterprise in existence under four years; after that, in any three of the five years ending with the current year |
| Contemporaneous records | Time reports, logs or similar records of the hours, the services, the dates and who performed them |
| A statement with the return | Attached to a timely filed original return, describing the properties and stating the conditions were met |
Rental services include advertising, negotiating leases, screening tenants, collecting rent, daily operation and repairs, management and supervising staff and contractors. They can be performed by owners, employees, agents or independent contractors, so a property management company's hours can count. Financial and investment management, such as arranging financing or reviewing reports, does not count. Triple net leases are excluded.
A deal that does not use the safe harbor can still qualify under section 162.
What changed in 2025?
Before 2025, section 199A was set to stop applying to tax years beginning after December 31, 2025. Public Law 119-21, signed July 4, 2025, amended the statute so it no longer ends. For tax years beginning after December 31, 2025, the law also:
- Widened the phase-in range for taxpayers above the threshold from $50,000 ($100,000 joint) to $75,000 ($150,000 joint)
- Added a minimum deduction of $400 for a taxpayer with at least $1,000 of QBI from active trades or businesses, meaning ones in which the taxpayer materially participates under section 469(h)
That minimum deduction generally does not help a passive limited partner, because it requires material participation. For 2025, the Schedule K-1 instructions list the threshold for using the simpler Form 8995 as taxable income of $197,300, or $394,600 if married filing jointly.
What does my K-1 show?
The partnership reports the information you need in box 20, code Z, "Section 199A information," according to the partner's K-1 instructions. That includes your share of QBI items, the W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property for each trade, business or aggregation. You or your preparer then use Form 8995 or 8995-A.
Above the income threshold, the deduction for each business is limited to the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of UBIA. A syndication often has few W-2 wages because its manager is a separate company, but its UBIA can be large because it includes the building. See what a K-1 is.
What happens in a loss year?
Many deals show a tax loss in early years because of depreciation, especially with bonus depreciation. The Form 8995 instructions say that if you have a qualified business net loss for the year, you do not get a QBI deduction (unless you have REIT dividends or PTP income), and the loss carries forward to next year.
Losses suspended by other rules, such as the passive loss rules, enter QBI only when they are allowed in computing taxable income. See apartment syndication taxes for beginners for how passive losses work.
A made-up example
This example uses made-up numbers and assumes an investor below the income threshold whose deal is treated as a trade or business. It is not a tax calculation.
| Year | QBI from the deal | Carryforward used | Net QBI | Deduction at 20% |
|---|---|---|---|---|
| Year 1 | -$15,000 | None | -$15,000 (carried forward) | $0 |
| Year 2 | $20,000 | -$15,000 | $5,000 | $1,000 |
| Year 3 | $20,000 | None | $20,000 | $4,000 |
In year 2, $20,000 - $15,000 = $5,000 and 20% x $5,000 = $1,000. In year 3, 20% x $20,000 = $4,000. Each year's deduction is also capped at 20% of taxable income minus net capital gain, which this example assumes is higher. If the year 1 loss were passive and suspended, it would enter QBI only in the year it was allowed.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). DoorRaise prepares the standard offering documents, forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, investors fund by wire only and distributions are quarterly by default. Fees are $1,500 at setup (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise and no part of the promote. The deal's own accountant decides the section 199A reporting. DoorRaise is not a law firm, broker-dealer, investment adviser, funding portal or bank, and gives no tax advice.
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FAQ
Do I need to materially participate to get the QBI deduction from a syndication?
No. The trade or business test is applied at the partnership level, and the Form 8995 instructions say material participation is not required. The new $400 minimum deduction is the exception: it requires material participation.
Is the gain when the building sells QBI?
Capital gain is not QBI. Part of the gain may be taxed as ordinary income under the depreciation recapture rules, and how that part is treated is a question for your preparer. See depreciation recapture.
What if my K-1 has no code Z?
Ask the deal's accountant. The partnership may have concluded its rental activity is not a trade or business, or the information may be in an attached statement.
Is the QBI deduction permanent now?
Public Law 119-21 removed the end date that would have ended it after 2025. A future law could still change it.
Next step: read what a K-1 is for syndication investors to see where box 20 fits among the other items.
Sources
- 26 U.S.C. 199A, qualified business income
- IRS Revenue Procedure 2019-38
- IRS: Qualified business income deduction
- IRS: Instructions for Form 8995
- IRS: Partner's Instructions for Schedule K-1 (Form 1065)
- Public Law 119-21
This article is general information as of October 2026, not legal, tax or investment advice. The example uses made-up numbers. Talk to a tax professional about your own situation. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.