Taxpayers who engage in renting real property have multiple accounting, tax and legal issues that should be considered. To reap the highest benefits from the activity it is in your best interest to talk with a professional who is knowledgeable and objective.
One of the tax topics to be evaluated is the qualified business income deduction. The Tax Cut and Jobs Act (TCJA) introduced a new business deduction (under IRC Section 199A) for certain taxpayers beginning January 1, 2018 through December 31, 2025. The key to utilizing this business deduction is engaging in a trade or business. Rental real estate activities do not default to qualifying as a trade or business. The nature of the rental activity may not be regular and interaction with tenants may not be frequent. A safe harbor included in Revenue Procedure 2019-38 may be relied upon when evaluating whether the rental activity qualifies for the business deduction. In addition, the IRS has assembled information in a Frequently Asked Questions format and Real Estate Tax Tips to discuss some other technical issues.
The safe harbor establishes certain criteria that must be present in order to utilize the business deduction under 199A. In summary, they are:
- Maintain separate books and records to reflect income and expenses for each rental real estate activity.
- Perform, at a minimum, 250 or more hours of rental services, as defined under the revenue procedure.
- 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.
As a rental property owner, planning for a favorable return on your rental real estate investment can get complex. Knowing and understanding the multiple accounting, tax and legal issues is a good foundation. If you would like to discuss the issues, do not hesitate to contact me.