20% pass through deduction for 2018

[Brian S.]

I own an insurance agency and over the last 13 months I have bought, rehabbed, and rented 5 SFR’s... I actively manage the properties and I run them like a business. I meet/screen prospective tenants, I cut grass, paint, hire contractors, monitor and pay all bills, and I’m working on designing a website for my rental business. Why am I being told I don’t qualify for the 20% pass thru deduction since buy and hold rentals are considered passive investments? I put in more than 750 hours managing this side business?

[Natalie Kolodij]

Originally posted by @Brian S.:

I own an insurance agency and over the last 13 months I have bought, rehabbed, and rented 5 SFR’s... I actively manage the properties and I run them like a business. I meet/screen prospective tenants, I cut grass, paint, hire contractors, monitor and pay all bills, and I’m working on designing a website for my rental business. Why am I being told I don’t qualify for the 20% pass thru deduction since buy and hold rentals are considered passive investments? I put in more than 750 hours managing this side business?

If you do a search on here there have been several discussions on the topic. 

Typically real estate is passive and the IRS didn't issue guidance specific to rentals with regard to the new 20% passthrough , nor does it plan to. 

What it comes down to is whether your real estate rentals meet the  level of a business per IRC 162. This is very open to interpretation and comes down to making an educated determination based on prior tax cases and interpretations- since the IRS didn't clearly lay it out. And how closely your business mimics the requirements of IRC 162 and can be backed by earlier tax court rulings. 

If your tax person hasn't dug deep enough into this new issue to come to this conclusion they  may not be specialized in real estate.