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Is Your Rental Eligible for a Qualified Business Income Deduction?

Written by LGT Staff | Jul 3, 2019

As we approach the summer months and the Tax Cuts and Jobs Acts is in full effect, we want to provide you with some additional information as it relates to rental real estate enterprises and the flow-through qualified business income deduction (QBID) for individuals.

On January 18th, 2019, the Internal Revenue Service (IRS) issued a proposed revenue procedure that provides a safe harbor for rental real estate enterprises to be treated as a trade or business for purposes of Internal Revenue Code Sec. 199A, the 20% qualified business income deduction. For the purpose of the safe harbor, a rental real estate enterprise is deemed an “interest in real property held for the production of rents and may consist of multiple properties.” Taxpayers with multiple rental activities are required to either treat each entity separately or treat all similar property as a single rental enterprise. Additionally, taxpayers may not change the treatment of the “single rental” enterprise from year-to-year unless there is a significant change in circumstances.

There are three requirements with respect to the trade or business classification under the safe harbor.

Each rental enterprise must follow:

  1. Maintain separate books and records reflecting income and expenses for each enterprise;
  2. Perform 250 or more hours of rental services with respect to each rental enterprise; and
  3. Keep year-to-date records, including time reports and logs regarding:
    1. Hours of service performed
    2. Description of service performed
    3. Dates of when the service was performed
    4. Individuals who performed the service
For purposes of the safe harbor, rental services include advertising, collecting rent, conducting daily operations, purchasing materials, and performing maintenance and other managerial services in connection with the enterprise. Additionally, these services can be performed by owners, employees, agents, and/or independent contractors of the owners.

The 250-hour requirement became effective January 1, 2019 and will run through tax year-end December 31, 2022. For the tax year January 1, 2023 and forward, 250 rental service hours must be performed in any three of five consecutive years.

There are a few limitations to the safe harbor—one being that any property used for personal purposes at any point in the year by the owners will not qualify as a trade or business under the safe harbor revenue procedure. Also, triple net leases do not qualify, unless the property is being rented to another trade or business that is commonly controlled.

We’re happy to help you understand how the safe harbor could apply for your specific purposes. Contact our real estate team today to ensure you receive all the benefits available. Scroll down for our contact options.