How §199A applies to rental real estate

Sec. 199A allows taxpayers other than a corporation a deduction equals the lesser of (1) the taxpayer's Combined Qualified Business Income Amount (CQBIA); or (2) 20% of the amount of a taxpayer's taxable income for a taxable year in excess of the taxpayer's net capital gain for that taxable year.

The IRS and Treasury Department acknowledged this when they stated that taxpayers may have difficulties “in determining whether a taxpayer's rental real estate activity is sufficiently regular, continuous, and considerable for the activity to constitute a qualified trade or business for §199A purpose.” For this reason, the IRS published Notice 2019-07 to create the concept of a rental real estate enterprise and contained safe harbor conditions whereby a rental real estate interest that satisfied this definition and met the other conditions specified in that Notice would be treated as a trade or business for purposes of §199A. Afterwards, The IRS issued Rev. Proc. 2019-38 in response to those comments concerning Notice 2019-07 and its conditions. Rev. Proc. 2019-38 applies to taxable years that end after December 31, 2017.

RENTAL REAL ESTATE ENTERPRISE

A rental real estate enterprise is either an interest in a single item of real property or an interest in multiple real properties held by an individual or a Relevant Passthrough Entity (RPE) for the production of rents. These real property interests must be held either directly by the individual or RPE or through a disregarded entity.

Whether the safe harbor conditions of Rev. Proc. 2019-38 are satisfied is an annual determination. All four of the following safe harbor requirements below must be satisfied by any taxpayers or RPEs who desire to rely upon the safe harbor of Rev. Proc. 2019-38.

Requirement One: Separate Books and Records

Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. Those records could perhaps be maintained by a bookkeeping service or a real estate management company. The records that support the Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property and W-2 wages should also be required.

Requirement Two: 250 or More Hours of Rental Services

The required number of hours of rental services with respect to a rental real estate enterprise depends upon the number of years that a rental real estate enterprise has existed. Since a rental real estate enterprise concept and §199A were not part of federal tax law prior to tax years ending after December 31, 2017, this would be the criterion that would have to be met for tax years ending on December 31 of 2018, 2019, and 2020.

Requirement Three: Maintenance of Contemporaneous Records

All of the following: (1) number of service hours; (2) description of all services performed; (3) the dates those services were performed; and (4) the persons or entities who performed those services must be maintained.

Requirement Four: Statement to Be Attached to Tax Return

Required eligible signed statement must be attached to a timely filed original return.

---

Touch base to us for your concerns and we are here to help!