Preface: If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the section 199A deduction.
Safe Harbor Rule for Rental Real Estate Businesses with Section 199A
The IRS has 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. Individuals, estates and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
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.
Qualifying rental services under the safe harbor include:
- 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 real estate;
- purchase of materials;
- supervision of employees and independent contractors;
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.
It is essential to note that certain real estate types excluded under Code Sec. 199A are real estate used for personal residence by the taxpayer and triple net lease arrangements.
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.