The IRS has issued guidance on a safe harbor for certain rental real estate businesses to qualify as a trade or business for the qualified business income deduction under Code Sec. 199A.
Congress enacted Code Sec. 199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer's qualified business income from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship.
Safe harbor requirements for a rental real estate business to be considered a qualified trade or business include maintaining separate books and records for income and expenses; participation in a minimum number of hours in rental services; and maintaining reports or logs for dates of service, description of services performed, and hours tracking. Rental services include activities such as advertising, negotiating and executing leases, verifying information contained in tenant applications, collecting rent, management, maintenance and repair of the property and various other services.
The term “rental services” does not include financial or investment management activities (such as arranging financing), procuring property, studying and reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements, or hours spent traveling to and from the real estate.
Certain real estate types excluded under Code Sec. 199A are real estate used for personal residence by the taxpayer and triple net lease arrangements. An exception to the triple-net lease exclusion exists for “self-rental”. If the property leased is under common control, and the tenant carries on a trade or business, the triple-net-lease is eligible for the Section 199A deduction.
Please call our office to discuss these safe harbor requirements for rental real estate businesses. We can review your current business operations and organization to see if your rental real estate business qualifies for the Code Sec. 199A deduction.