IRS Releases Additional Guidance on Rental Property and the Section 199A Deduction

Section 199A of the Internal Revenue Code was enacted on December 22, 2017, as part of the 2017 Tax Cuts and Jobs Act. It provides a deduction of up to 20% of income from a domestic trade or business operated as a sole proprietorship or through a partnership or S corporation, trust, or estate for tax years beginning after December 31, 2017, and ending before January 1, 2026.

In order to claim the Section 199A deduction, a taxpayer must be engaged in a trade or business as provided for in Section 162(a) of the Internal Revenue Code. It is not always clear whether rental real estate activities constitute a trade or business eligible for the 199A pass-through deduction. To assist taxpayers in making this determination, the U.S. Treasury recently released Notice 2019-07, which provides for a safe harbor under which a rental real estate enterprise will be treated as a trade or business solely for purposes of Section 199A.

To meet the safe harbor test, the following requirements must be satisfied during the taxable year with respect to the rental real estate enterprise:

1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
2. For taxable years beginning prior to January 1, 2023, 250 hours of “rental services”¹ must be performed with respect to the rental real estate enterprise each year by an owner, employee, agent, or independent contractor. For taxable years beginning after December 31, 2022, the 250 or more hours of rental services performed per year as defined in the notice with respect to the rental real estate enterprise must be in any of three of the five consecutive taxable years that end with the taxable year in which the deduction is claimed.
3. Contemporaneous records, including time reports, logs, or similar documents regarding the following: (i) hours of services performed, (ii) description of all services performed, (iii) dates on which such services were performed, and (iv) who performed the services, must be maintained by the taxpayer (the contemporaneous records requirement does not apply for tax years beginning before January 1, 2019).

Real estate rented under a triple net lease is not eligible for this safe harbor.

The taxpayer relying on this safe harbor must attach a statement to their tax return stating, under penalty of perjury, that they have met the requirements of the safe harbor.

For those who do not qualify to use the safe harbor and still wish to claim the 199A deduction, the fall back is to prove that the rental enterprise fits within existing Internal Revenue Code Section 162(a) rules.

For additional information on the 199A deduction and how it might impact your tax liability for your rental property, contact your B|O|S advisor and/or tax advisor.

Footnote:

^1. Rental services include (i) advertising to rent or lease; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors. However, “rental services” does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

Disclosure:

It is the responsibility of any person or persons in possession of this material to inform himself or herself of and to seek appropriate advice regarding any investment or financial planning decisions, legal requirements, and taxation regulations which might be relevant to this topic and to his or her specific situation.

Opinions expressed in this article, which are not reliable as fact, are current as of 3/12/19 and are subject to change.