While most of the posts on this blog pertain to estate planning topics, there are a few income tax related items that are making the tax headlines.
Tax professionals are in the midst of sorting through the nuances of the Tax Cuts and Jobs Act of 2017 (the “Act”) as they begin to prepare 2018 income tax returns. A notable addition to the Internal Revenue Code (the “Code”) as a result of the Act is Sec. 199A, which allows a deduction up to 20 percent of a non-corporate taxpayer’s qualified business income. This new deduction only applies to a qualified trade or business other than a specified service trade (as further defined). The definition of a trade or business remains consistent with Sec. 162’s standard.
The Department of Treasury has proposed regulations for this new section. Additionally, the Internal Revenue Service has issued guidance on several items related to the new deduction, one of which is a separate safe harbor for owners of rental real estate who wish to avail themselves of the deduction.
IRS Notice 2019-07 (the “Notice”) provides that a rental real estate enterprise will be treated as a trade or business for purposes of Sec. 199A if the following requirements are satisfied during the taxable year:
(1) separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
(2) for tax years prior to January 1, 2023, 250 or more hours of rental services are performed per year with respect to the rental enterprise; for tax years after December 31, 2022, 250 or more hours of rental services are performed in any three of the five consecutive taxable years; and
(3) the taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services.
According to the Notice, a rental real estate enterprise is an interest in real property held for the production of rents and may consist of an interest in multiple properties.
Keep in mind that these requirements are solely for purposes of determining the eligibility of the taxpayer’s QBI deduction under Sec. 199A.
Rental real estate owners should recognize most of these requirements since they are very similar to the real estate professional rules under the Sec. 469 Regulations. However, the reduction of the hour requirement may provide an additional tax incentive to those taxpayers who devote 250 hours of activity to rental real estate activities.
It is strongly advised that taxpayers consult with their tax counsel to ensure compliance with this new safe harbor.