Rental Property Investor · Sacramento, CA · Member since 2012 · 26 posts · 9 votes
For those that are interested, see the new IRS Notice 2019-07 that was just released. After a quick skim (page 7), it looks like we finally have our guidance on possibly claiming the 20% QBI deduction on rental income.
Safe Harbor for Sec 199A:
A. Keep separate books
B. 250 or more hours/year service
C. For 2019 and future years, maintain a detailed log as well
Side note; If you have Commercial and Residential, you need to treat them as separate enterprises for this purpose. Also triple net leases not eligible for Safe Harbor. Keep this in mind and adjust your strategies accordingly. :)
Happy to see this post, I don't yet have a full understanding of this new deduction and I'm actively trying to learn more about it. If anyone here is able to share their thoughts on this topics it will be greatly appreciated.
@Marcony Simoes, Yes-very happy the IRS finally put this out for clarification. In a nut shell; this is the best of both worlds. If you meet the Safe Harbor rules you clearly and easily get to treat your RE as a business for purposes of this new deduction, but not an actual business at the same time. You therefore do not put the property on a Schedule C (thus saving you on Self Employment taxes). The property gets to remain on a Schedule E and you get the new Qualified Business Income 20% deduction on the rents......of course "everyone's exact situation is different"..."consult your tax adviser".."this is not legal advice", yada yada, but that's a summary of the new law at the basic level.
Feel free to PM if you have any specific questions.
@Brandon G. thanks for this quick synopsis! Have you developed your strategy around this? Do you know if this requires a separate LLC or can be done without? Does it matter if we have a property manager helping? Can we be in the safe harbor if we manage the manager? Thoughts? Any other resources or articles you have found would be appreciated!
As far as reference, check out the actual IRS notice that was published (2019-7) as a starting point. Sometimes people misinterpret, so i like to go straight to the source first, then read the misc articles....
@Brandon G. Hi and thanks for the update. So is this the same as the “pass through” I’ve heard about, where you pass through the rental income as a business, and therefore are only taxed at 20%, as opposed to being taxed at personal income rates with potentially higher tax brackets?
Also, are you sure that you do not need to have the properties in any form of "business structure" such as LLC's? Is there anything from the IRS that speaks to that? For me that's a dealbreaker, as spending the money and hassle to form LLC's for each property offsets the tax savings! If I can just keep properties on schedule E, under personal ownership, that'd be awesome!
@Amit M. It is possible that we are talking about the same thing but your description is not exactly accurate. This new law allows for a 20% deduction of Qualified Business Income when applicable, and has nothing to do with the actual tax rate. A lot of misconceptions are floating around out there and are being repeated. i always joke with my clients (but serious), "be careful who you listen to for tax advice". Ultimately, in this example, where we do not have a corporate business structure, your net income from the Schedule E rental activity will still be taxed at your personal tax rate whether you are eligible for the new 20% deduction or not. It will not necessarily be considered self-employment however.
Yes, your Schedule E can be considered to be pass-through for purposes of this deduction. You do not necessarily need a LLC or S-Corp, BUT remember that the rental activities need to be treated as a business to qualify. This is "business" determination is no longer a subjective or unclear statement now that the new IRS notice was sent out. Make sure you meet these guidelines.
I like your idea of not creating a LLC just for this purpose. Your additional accounting costs (CA568), and CA FTB costs ($800 min/yr) makes it hard to justify. If its not needed don't do it is what I would advise.
As always, I recommend that you consult your tax adviser for your exact situation to make sure that you in fact qualify, report correctly, and to help guide your current and future tax strategies.
Yes, you can research with the IRS references online to verify your strategy is legal. Just keep in mind that they are behind schedule on posting a lot of updated material on their website due to the earlier shutdown. If you have a good accountant, he/she will be able to confirm these new laws for you as well.
I have a SFH with PM in place. I am supposed to get the 20% deduction on it. I draft F1040 Schedule E and I am going to fill Form 8995. Not sure the meaning of line 3 and 4: 3.Qualified business net (loss) carryforward from the prior year
4.Total qualified business income. Combine lines 2 and 3. If zero or less, enter -0-