Section 199A – Rental Real Estate Safe Harbor
The availability of the 20 percent deduction for qualified business income (QBI deduction) with respect to a rental real estate activity.
If all the general requirements (which vary based on your level of taxable income) are met, the deduction can be claimed for a rental real estate activity – but only if the activity rises to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.
Because determining whether a rental real estate enterprise meets the applicable criteria for a trade or business can be difficult, the IRS has provided a safe harbor under which such an enterprise will be treated as a trade or business for purposes of the QBI deduction. For this purpose, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.
Generally, you may either treat each interest in similar property held for the production of rents as a separate rental real estate enterprise or treat interests in all similar properties held for the production of rents as a single rental real estate enterprise. For purposes of applying the safe harbor, properties held for the production of rents are similar if they are part of the same rental real estate category. The two types of rental real estate categories for the purpose of combining properties into a single rental real estate enterprise are residential and commercial. Thus, commercial real estate held for the production of rents may only be part of the same enterprise with other commercial real estate, and residential properties may only be part of the same enterprise with other residential properties.
Once you treat interests in similar commercial properties or similar residential properties as a single rental real estate enterprise under the safe harbor, you must continue to treat interests in all similar properties, including newly acquired properties, as a single rental real estate enterprise. However, if you choose to treat an interest in each residential or commercial property as a separate rental real estate enterprise, you may choose to treat your interests in all similar commercial or all similar residential properties as a single rental real estate enterprise in a future year.
While commercial and residential real estate may not be part of the same enterprise, you have the option of treating an interest in mixed-use property as a single rental real estate enterprise or bifurcating the interest into separate residential and commercial interests.
Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year with respect to the rental real estate enterprise:
(1) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
(2) For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise. For rental real estate enterprises that have been in existence for at least four years, in any three of the five consecutive tax years that end with the tax year, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise.
(3) The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. If services with respect to the rental real estate enterprise are performed by employees or independent contractors, the taxpayer may provide a description of the rental services performed by such employee or independent contractor, the amount of time such employee or independent contractor generally spends performing such services for the enterprise, and time, wage, or payment records for such employee or independent contractor. These records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to tax years beginning before January 1, 2020.
For purposes of the safe harbor, rental services include:
· advertising to rent or lease the real estate;
· negotiating and executing leases;
· verifying information contained in prospective tenant applications;
· collecting of rent;
· daily operation, maintenance, and repair of the property, including the purchase of materials and supplies
· management of the real estate; and
· supervision of employees and independent contractors.
Some types of rental real estate are not eligible for the safe harbor. Real estate used by a taxpayer (including an owner or beneficiary of passthrough entity) as a residence for any part of the year is generally not eligible for the safe harbor. Nor is real estate rented or leased under a triple net lease.