Under the Tax Cuts and Jobs Act new IRC §199A, individual taxpayers may deduct up to 20% of their domestic “qualified business income” (QBI) beginning in tax year 2018. The deduction phases out at $315,000 – $415,000 if you are married filing joint and $157,000 – $207,500 for all other filing status.
Under the proposed regulations, rental real estate enterprises that are not considered a specified service trade or business (SSTB) will qualify for section 199A deduction. Without a formal definition of what a real estate enterprise is, the IRS has provided a set of safe harbor qualifications to help taxpayers determine if they may treat their real estate activities as a qualified trade or business. For a rental real estate enterprise to qualify for treatment as a trade or business under safe harbor, the rental real estate enterprise must satisfy the following requirements:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
- For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed per year with respect to the rental enterprise. For taxable years after December 31, 2022, in any three of the five consecutive taxable years, 250 or more hours of rental services are performed per year. The 250 or more-hour requirement can be satisfied by owners, employees, agents, and/or independent contractors of the owners.
- Taxpayer maintains records, including time reports, logs, or similar documents, regarding what service was performed, who performed it, when it was performed and how long was it performed for. The record requirement will not apply to taxable years prior to January 1, 2019.
The safe harbor method also specifically disallows rental activities that are used personally for any part of the year or are rented using a triple net lease. If the enterprise fails to satisfy these three requirements, the rental real estate enterprise may still be treated as a trade of business for purposes of section 199A if they meet the definition of trade of business under §1.199A-1(b)(14).
If you have any questions or concerns regarding the latest releases from the IRS, feel free to reach out to your advisor at DKC for more information.