New IRC Sec 199A Tax News - Safe Harbor to Qualify

[Michael Rinaldi]

Hi BP Community,

Today some tax news came out that is very relevant to the industry. I'm sure many are aware of the new Sec 199A deduction which essentially allows for a 20% exclusion of income earned for business owners. Until today it was not entirely clear how the new rules applied to the owners of rental real estate. Specifically, it was unclear whether owning rental real estate would qualify as a trade or business for purposes of the new rule and therefore it was unclear whether your average investor would qualify for the exclusion.

Today, as part of the finalized regulations on Sec 199A, there is a new safe harbor that can be used to determine what constitutes a trade or business for purposes of 199A. In order to qualify, you must meet the following:

1. Property must be held directly by the individual or through a disregarded entity by the individual or passthrough entity seeking the 199A deduction, e.g., a person who owns a single-member LLC which holds a property would qualify

2. Commercial and residential real estate may not be part of the same enterprise

3. Separate book sand records are maintained to reflect income and expenses for each rental RE enterprise

Note: A separate real estate enterprise may constitute multiple properties as long as all commerical or all residential as noted above

4. 250 or more hours of rental services are performed for the enterprise (see detail below)

5. Contemporaneous time reports or logs are maintained to substantiate these hours, including hours, descriptions, dates, person involved, etc

For purposes of #4, these services include advertising to rent the property, negotiating/executing leases, tenant screening, collecting rent, performing repairs/maintenance, supervision of contractors/employees. Note: Services performed by owners or employees, agents, or contractors all count toward the 250. Time spent on financing or investment management does not count towards the 250 hours threshold.

Someone house hacking is excluded - you cannot live in the residence that is connected with the enterprise on which you are trying to take the deduction

As always - read the rules yourself and consult your tax accountant. There are other considerations for RE professionals not covered here. I'm a CPA but this does not constitute tax advice.

Safe Harbor Proposed Revenue Procedure

Final Sec 199A Regs

IRS Circular 230 Disclosure: This note and any attachments are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.