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QBI deduction for rental real estate businesses

The IRS issued a revenue procedure to help tax payers and relevant passthrough entities (RPEs) that provides a safe harbor. As per procedure a “rental real estate enterprise” will be treated as a trade or business for purposes of the qualified business income (QBI) deduction of Sec. 199A. A real estate business that does not meet the criteria of safe harbor may still qualify as a trade or business if it otherwise meets the definition under the Sec. 199A regulations. The IRS proposed rules in January 2019-07 notice, finalized in the revenue procedure.

According to safe harbor procedure, the rental real estate enterprise that exists in business for less than four years will be treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise.

This requirement is met if a rental real estate enterprises that have been in existence for at least four years, and performed 250 or more hours of rental service each year in any three of the five consecutive tax years that ends with the tax year.

The procedure describes the Service Hours as “The time spent on rent collection, payment of expenses, maintenance and repairs, provision of services to tenants, and efforts to rent the property. The services provided by owner, its employees or independent contractors will also be treated as Service Hours. However, it does not include time spent by owner as an investor to arranging finance, procuring property, reviewing financial statements or reports on operations, and traveling to and from the real estate, and will not be considered hours of service for the enterprise.

For the purpose of safe harbor a rental real estate enterprise is defined as interest in real property for the production of rents. A rental real estate enterprise may consist of multiple properties but it cannot combine commercial and residential properties in the same enterprise. The interest must be taken directly or through a disregarded entity. The taxpayers must either treat each property as a separate enterprise for the purpose of rent production or must treat all similar properties as a single enterprise for the purpose of rent production.

For safe harbor separate books and records must be maintained for the rental real estate enterprise. Property leased under a triple net lease or used by the taxpayer (including an owner or beneficiary of a relevant passthrough entities RPE) as a residence under Sec. 280A(d) would not be eligible under the safe harbor.

The Other requirements in the safe harbor are:

  • The taxpayer must maintain synchronous records including time reports, logs, or similar documents, regarding timesheet, hours spent, and descriptions of all services performed and who performed them.
  • The taxpayer or RPE must attach a statement on which the safe harbor is claimed upon, to the tax return for each tax year.

The taxpayer or RPE must attach a statement on which the safe harbor is claimed upon, to the tax return for each tax year.

The safe harbor is effective for tax year ending after Dec. 31, 2017. Taxpayers may rely on Notice 2019-07 for the 2018 tax year because the final revenue procedure differs from the proposed revenue procedure. The synchronous records requirement does not apply to tax years beginning before Jan. 1, 2020, but it is reminded that taxpayers must prove their claim for entitlement of any tax deduction.

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