New IRS Guidance Provides Rental Real Estate Safe Harbor for 20 Percent Pass-Through Deduction

Under the new 2017 Tax Act, there has been much uncertainty surrounding the question of when rental real estate operations qualify as a trade or business for purposes of the new code section 199A qualified business income deduction.

The IRS has issued interim guidance that provides for a “safe harbor” under which a rental real estate enterprise will be treated as a trade or business and thus qualify for the 20% deduction. (Please note that real estate rented or leased under a triple net lease or real estate used by the taxpayer as a residence does not qualify for the safe harbor)

The three requirements are as follows:

1. Separate books and records (and separate bank accounts) are maintained to reflect income and expenses for each rental real state enterprise
2. 250 hours or more of rental services are performed per year with respect to the rental enterprise. Rental services may be performed by owners as well as employees, agents or independent contractors of the owners. Rental services include advertising to rent, review of tenant applications, negotiating and executing leases, collection of rent, daily operations, maintenance and repair of property, purchase of materials, and supervision of employees and independent contractors. Rental services do not include financial or investment management activities such as arranging financing; studying and reviewing financial statements or reports on operations; planning, managing or constructing long-term capital improvements; and hours spent traveling to and from real estate.
3. Beginning January 1, 2019, the taxpayer maintains contemporaneous records, including time reports, logs, or similar documents regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.

Obviously, it is important to immediately begin keeping those detailed records of rental services.

Based on safe harbor rules under interim guidance IRS Notice 2019-7