Rental Real Estate Enterprises May Be Eligible for Tax Deduction

March 19, 2019

You’ve probably heard about the provision in the Tax Cuts and Jobs Act (TCJA) that allows certain pass-through entities (sole proprietorships, S Corporations, partnerships) to claim up to a 20 percent deduction on their Qualified Business Income (QBI). But you may not know that this deduction could apply to your rental real estate enterprise.

One of the many areas of the TCJA that needed clarification was the question of whether a rental real estate enterprise could be considered a trade or business solely where Section 199A was concerned. Below are rules that may allow you to claim the QBI deduction for rental real estate:

Safe Harbor

The IRS is granting this “safe harbor” to rental real estate enterprises, which it defines as “…an interest in real property held for the production of rents and [which] may consist of an interest in multiple properties.”

There are requirements, of course. To be considered, your enterprise must:

  • Maintain separate books and records for each rental real estate enterprise’s income and expenses.
  • Perform at least 250 hours of rental services in taxable years before January 1, 2023. After that, the rules change.
  • Keep records updated (logs, time reports, etc.) for service dates, descriptions, workers involved, and hours performed for tax years after 2018. The IRS may inspect these at any time.

What Are Rental Services?

For the purposes of Section 199A, rental services can be carried out by the owners themselves or by agents, employees, and/or independent contractors. They cannot include financial or investment management activities (arranging financing, reading financial statements, working with long-term capital improvements, etc.).

They can include activities like:

  • Regular operation, as well as maintenance and repair of the property.
  • Rental or leasing advertising tasks.
  • Buying materials needed.
  • Supervising workers.

What Is Excluded?

There are exceptions to the safe harbor provision. For example, real estate used by the taxpayer as a residence for even part of the year is not eligible. This includes owners/beneficiaries of relevant passthrough entities, or RPEs. Nor is real estate leased or rented using a triple net lease, which mandates that the tenant not only pay rent and utilities, but also insurance, fees, and taxes, as well as helping with maintenance.

How will you know for sure how your rental real estate enterprise is affected by all of this? And how will you record it in your tax return? Consult with us. We can answer your questions about this and any other element of your income taxes. Contact us anytime for a consultation.

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