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Rental Real Estate Enterprises – Safe Harbor Rules to Qualify for 20% business income deduction

By January 22, 2019No Comments

Michael MacDonald, CPA, Principal

On Friday, January 18, 2019, the IRS released Notice 2019-07 concurrently with the release of the final regulations for the 20% deduction for qualified business income (also referred to as the “199A deduction”).  The notice contains a proposed revenue procedure that provides safe harbor rules to determine if an individual or pass-through entity’s rental real estate activity will be treated as a trade or business solely for section 199A of the Internal Revenue Code, and thus being eligible for the potential deduction.

Who should apply the proposed revenue procedure?

Any individual or relevant pass-through entity that holds an interest (directly or through a disregarded entity) in real property held for the production of rents.  A taxpayer’s interest may consist of multiple properties.  Additionally, the taxpayer may treat each property held as a separate enterprise or combine all similar properties as a single enterprise.  However, commercial and residential real estate may not be part of the same enterprise. 

Any real estate used as a residence for any part of the year, and any real estate rented or leased under a triple net lease (where lessor is responsible for taxes, insurance & maintenance) are excluded from applying the safe harbor.

What are the requirements to meet the safe harbor?

Must satisfy all three of the following requirements:
     (1) Maintain separate books and records for each rental real estate enterprise.
     (2) 250 or more hours of rental services must be performed for taxable years beginning prior to January 1, 2023.  Rental services may be performed by owners, or by employees, agents, or independent contractors.
     (3) Maintain contemporaneous records, and have them made available for inspection at the request of the IRS (not applicable to taxable years beginning prior to January 1, 2019)


Reporting requirements if safe harbor requirements are met:

Taxpayer must attach a signed statement to the tax return that claims the 199A deduction or passes through 199A information meets the requirements in Section 3.03 of the proposed revenue procedure.

Options if the safe harbor requirements are not met:

Taxpayers that do not meet the requirements may still be treated as a trade or business for purposes of Section 199A if the activity meets the definition of trade or business in Reg. 1.199A-1(b)(14).

The proposed revenue procedure is applicable to taxable years ending after December 31, 2017. 

Want to learn more?  Contact your Maillie representative and we can provide more detail to see if your rental qualifies.