Only 250 Hours? Sec. 199A and Rental Real Estate.

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.

Income Tax 101 For Homeowners!

Most individual taxpayers are aware of the annual income tax benefits of owning a home, such as the ability to deduct from gross income any mortgage interest and real estate taxes paid during the taxable year.  There are, however, other income tax rules of which homeowners should be aware, especially those who are disposing of a primary residence — either by sale or gift — or changing the home’s use from a primary residence to investment/rental property.  The article, 7 Tax Tricks For Homeowners , offers a good overview of the income tax implications that most taxpayers overlook in these circumstances.  As always, there’s no substitute for professional advice in these situations.

Clarity Is Key When Re-Registering Assets Into Trust

Recently, an Illinois appellate court decision held that a transfer of real property could be effectuated when the settlor of a trust indicated in the trust instrument that the property was a part of the trust corpus.  See my article, Do You Really Need A Deed?, for a summary of the court’s opinion.

Will You Owe Income Tax When You Sell Your Home?

As a result of my practice areas covering tax related matters and real estate transactions, clients often ask me whether they will be in for a surprise when they file their tax return the year after they sell their home.  As with most legal questions, the answer is “it depends.”  I have found that most people automatically assume they will pay no income tax from the gain that may result from the sale of their home.  However, that is not necessarily true.  Here’s why.

The Internal Revenue Code (“Code”) provides the following with respect to excluding the gain from the sale of your principal residence:

Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.[1]

Here are the key components to this part of the Code section:  (a) an understanding of what principal residence means; (b) the five-year period ending on the sale of the home; and (c) the amount of time you lived in the home during the five-year period.

The determination of “principal residence” is based on a facts and circumstances analysis that considers, for example, where you spend most of your time, your primary mailing address and the proximity of the home to your work location.[2]

If you considered the home you’re selling your principal residence for a total of two out of the last five years prior to the date of sale, then you meet what I call the “time” test.

Now, here’s the second part, which is what I call the “dollar amount” component.  For single tax filers, the amount of gain that you’re allowed to exclude is $250,000.[3]  For married filing jointly filers, the amount of gain doubles to $500,000.[4]  In the event that you meet the “time” test, any gain above your applicable exclusion threshold needs to be reported as income on your tax return.

There are exceptions to this rule, such as for work-related moves, unforeseeable circumstances and health-related moves.[5]  Some of these exceptions may allow for a total or partial exclusion of gain from the sale of your primary residence depending on other facts and circumstances.

In any event, above-mentioned factors should be evaluated when preparing your tax return the year following the sale of your primary residence.

[1] I.R.C. § 121(a).

[2] See IRS Pub. 523, Sale of Your Home, located at

[3] Id. at (b)(1).

[4] Id. at (b)(2).

[5] See IRS Pub. 523, Sale of Your Home, located at