Rental Real Estate Safe Harbor Provision

Recently, the IRS announced a safe harbor provision for rental real estate, where it may be treated as a business to receive the Qualified Business Income (QBI) Deduction under Section 199A. Rental real estate is defined for this purpose as “an interest in real property held for the production of rents.” Rental real estate can be a single property or multiple properties and its interest must be directly-held in property to produce rent(s). If a taxpayer has more than one residential property it can be combined to meet such requirements, however commercial and residential real estate must be in a separate enterprise and not combined.

The requirements that MUST be met to claim the QBI deduction are:

1. Taxpayer must maintain separate records for each rental real estate enterprise showing income and expenses,

2. If a rental real estate enterprise has been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.

3. 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.

4. The taxpayer or relevant passthrough entity attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.

250 hours of rental real estate services include and may be performed by the owner(s), employees and independent contractors:

1. Rent collection,

2. Maintenance and repairs of the property

3. Payment of expenses,

4. Managing the real estate

5. Purchasing of materials,

6. Efforts to rent the property, such as advertising,

7. Supervising employees and independent contractors,

8. Verifying tenant provisions and information on applications, and

9. Negotiating leases.

There are certain activities that are NOT included in meeting the 250 hour requirement. These activities include:

1. Planning, managing, or constructing long-term capital improvements to the property,

2. Procuring Property,

3. Financial or Investment Management Services, including arranging financing,

4. Time spent traveling to and from the property and

5. Studying or reviewing financial statements or operating reports.

Commencing in 2020, the taxpayer must maintain contemporaneous records and documents of the 250 hours spent to meet this requirement. It is important to document:

1. The hours of services performed,

2. The dates the services were performed,

3. A description of the services and

4. Who performed such services.

For further information and ways to maximize your QBI deduction, schedule an appointment with Stephen Lam, CPA. He can provide additional information on how this new safe harbor provision will work for your specific rental real estate enterprise. Further, we offer bookkeeping services in order to keep your financial records in line.

To schedule an appointment, call us at 908.689.3777 or email us at info@lamcpas.com.