Section 199A Rental Property FAQ’s
December 17, 2019
Section 199A continues to be one of the most complicated changes brought on by the TCJA, therefore the IRS continues to add more questions to the set of frequently asked questions. To help clear things up, we’ve summarized a recent release in which the IRS addressed several questions surrounding Section 199A (Qualified Business Income Deduction “QBID”) as it pertains to the rental real estate industry.
The questions and subsequent answers targeted what qualifies a rental real estate enterprise (defined as property(s) held for the production of rents either directly or by a relevant passthrough entity) as a trade or business and if it is treated as a trade or business, then how does that effect other filing positions in your return.
The initial question of “when is RRE treated as a trade or business?” is answered by satisfying ANY of the following three criteria:
- It rises to the level of a Section 162 trade or business
- It meets the requirements for safe harboring laid out in Revenue Procedure 2019-38, or
- It is a “self-rental” to a trade or business described in Treas. Reg. 1.199A-1(b)(14).
Where applicable you would prefer to be eligible for Qualified Business Income (QBI) through the safe harbor provided within Rev. Proc. 2019-38 which maintains you must satisfy ALL the following criteria:
- The taxpayer maintains separate books and records for each enterprise, if there are multiple properties then the taxpayer must maintain separate income and expense information for each property,
- More than 250 hours of rental services are performed for either (note that this is different than the material participation rules within Section 469)
- Each of the previous three years, if in existence less than four years, or
- Any of three of the five immediately proceeding years that end with the taxable year in question, if in existence more than four years, and
- The taxpayer must maintain records showing the following four details:
- Hours of all services performed,
- Description of all services performed,
- Dates on which services were performed, and
- Who performed the services.
- If the taxpayer satisfies the above three requirements and they intend to rely upon the safe harbor they MUST attach a statement, to a timely filed return including extension, for each taxable year. The statement must contain the following:
- Description of all rental real estate properties included in each enterprise, including address and rental category,
- Description of rental properties either acquired or disposed of during the taxable year, including address and rental category, and
- Representation that all four requirements of revenue procedure 2019-38 have been satisfied
It is important to note Revenue Procedure 2019-38 addresses mixed-use property and related commercial v. residential properties. It is important to distinguish that the taxpayer may include residential properties with other residential properties, likewise with commercial properties, in their own rental real estate enterprise. They may segregate mixed-use properties to underlying residential and commercial activities or maintain the mixed-use property as its own enterprise. The treatment for mixed-use properties should be uniform and if in subsequent years the taxpayer acquires/disposes of properties they should be treated similar to prior year enterprise groupings.
The IRS maintains that it is the burden of the taxpayer to maintain contemporaneous records in order to rely upon the safe harbor, but the safe harbor is not necessary to make the assertion that your rental real estate enterprise is eligible for Section 199A treatment. The taxpayer may still seek QBI treatment through either point 1 or point 3 of the initial question above.
If you have any additional questions about your ability to qualify for the 199A deduction, please don’t hesitate to Contact Us.