The IRS has recently issued guidance on a safe harbor for rental property to be classified as a trade or business under the new tax act and be eligible for the Sec 199A deduction to non-corporate taxpayers. (Up to 20% of the qualified business income)
Considerations and Requirements
1. Recordkeeping – Separate books and records must be maintained to reflect income and expenses for each rental enterprise.
2. Rental Services – 250 or more hours of rental services per year for the rental enterprise must be performed.
This means that the taxpayer must maintain documentation showing services performed, dates and who performed the services. (The IRS may inspect the records.)
Rental services include:
- Advertising to rent or lease the real estate
- Negotiating and executing leases
- Verifying information contained in prospective tenant application
- Management of the real estate
- Purchase of materials
- Supervision of employees and independent contractors
Rental services do not include:
- Financial or investment management activities
- Construction
3. Multiple Properties – Multiple properties may be grouped together as one rental enterprise. However, commercial and residential properties may not be in the same enterprise.
4. Triple Net Leases – Properties under triple net
lease will not qualify.
A triple net lease includes a lease agreement that requires the tenant or
lessee to pay taxes, fees, and insurance and be responsible for maintenance
activities.
5. Tax Return Statements – A statement must be attached to the tax return signed by the taxpayer or their representative declaring under penalties of perjury that they have met the required provisions (above).
Conclusion
The above requirements can be arduous and a great deal of work. Yet, the
tax deduction may be worth the effort.
Special note on Self-Rented Properties (property you own
that is rented to your business):
Under Proposed Reg §1.199A-1(b)(13). ” …rental or licensing of tangible or
intangible property (rental activity) that does not rise to the level of a
section 162 trade or business is nevertheless treated as a trade or business
for purposes of section 199A, if the property is rented or licensed to a trade
or business which is commonly controlled…”This means that
“self-rented” property should normally qualify as a trade or business when
rented to your qualifying trade or business.
If you have rental properties, now would be a good time to contact your tax professional to discuss the options available to you.
Richard D. Piquet, CPA, Shareholder
RP&B CPAs