Qualified Business Deduction for Rental Real Estate Operators
The new tax law allows non-corporate taxpayers to claim a deduction of up to 20% of their qualified business income. Until recently, the application of this law to rental real estate operators was uncertain. The IRS has now issued Notice 2019-7, which clarifies the terms under which a rental real estate business may take advantage of this new deduction and provides a safe harbor under which a rental real estate enterprise will be treated as a trade or business if certain requirements are met. The purpose of this email is to make you aware of these new requirements so you can take any necessary steps to qualify for this safe harbor.
First, it is important to understand the definition of rental real estate enterprise (RREE):
• A RREE is defined as an interest in real property held for the production of rents.
• A RREE may consist of multiple properties (but commercial and residential real estate may not be part of the same enterprise).
• The taxpayer must either treat each property as a separate RREE OR treat all similar properties as a single enterprise.
• Most partnerships or S corporations that are owned directly or indirectly by at least one individual, trust, or estate may also use this safe harbor to determine whether a RREE is a trade or business. Certain estates or trusts may also be eligible to use this safe harbor.
The recordkeeping requirements are as follows:
• Separate books and records must be maintained to show the income and expenses for each RREE.
• 250 or more hours of rental services must generally be performed each year with respect to the RREE.
• The taxpayer is required to maintain contemporaneous records including time reports, logs, or a similar document that includes:
o Hours of all services performed,
o Description of all services performed,
o Dates on which such services were performed, and
o Who performed each service.
o This contemporaneous recordkeeping requirement has been waived for the 2018 tax year but will apply to all years thereafter.
• These records must be available for inspection by the IRS upon request.
Rental services that can be considered in meeting the 250-hour threshold are as follows:
• Advertising to rent or lease the real estate,
• Negotiating and executing leases,
• Verifying information contained in prospective tenant applications,
• Collection of rent,
• Daily operation, maintenance, and repair of the property,
• Management of the property,
• Purchase of materials, and
• Supervision of employees and independent contractors.
These services may be performed by owners, employees, agents, or independent contractors of the owners.
The term rental services does not include financial or investment management activities such as arranging financing; procuring property; reviewing financial statements or reports on operations; planning, managing or construction long-term capital improvements; or hours spent traveling to and from the real estate.
Beginning with the 2018 tax year, taxpayers will be required to attach a signed statement to their income tax returns to declare that they have satisfied the requirements for this safe harbor. We will be contacting you if this applies to your circumstances. In the interim, if you have any questions about these new requirements or the application to your particular circumstances, please do not hesitate to contact us.