Rental Real Estate – Finalized Safe Harbor Rules Allow Qualified Business Income Deduction
New safe harbor rules issued regarding rental real estate issued by IRS.
The IRS issued Revenue Procedure 2019-38 on September 24th that explains the safe harbor allowing certain interest in rental real estate, including interest in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction (section 199A deduction).
By meeting the safe harbor requirements, an interest in rental real estate will be treated as a trade or business for proposes of section 199A and allows the exclusion of up to 20% of the income from the rental property in computing taxable income in combination with all qualified business income. The following requirements must be met by taxpayers to qualify for this safe harbor:
· Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
· If the enterprise has been in existence less than 4 years, then 250 or more hours of rental service are required to be3 performed per year, while others must meet 3 out of 5 past years.
· The taxpayer must maintain time report logs or other documentation regarding the time associated with services performed to meet the 250-hour requirements.
· A statement must be attached to the taxpayer’s tax return for the tax years the safe harbor is relied upon.
Services performed by owners, employees, and independent contractors and time spent on maintenance, repairs, rent collection, payment of expenses, provision of services to tenants, and efforts to rent the property are taken into account in meeting the 250-hour requirement.
Section 199A is a complex tax law change that was part of the Tax Cuts and Jobs Act, and the safe harbor rules for rental real estate now clarify what taxpayers will need to meet in order to qualify for the potential exclusion from taxable income for part of the income being generated from their qualified properties. The safe harbor is effective for tax years ending after December 31, 2017.
It is always a good idea to explore your tax situation with your tax advisor before making assumptions on how the rules will apply to your personal return.