Rental Real Estate Now Eligible for QBI Deduction Under IRS Safe Harbor
Rental real estate owners have been granted safe harbor with the Internal Revenue Service now allowing them to claim certain interests in property, including interests in mixed-use spaces, as a qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).
If all safe harbor requirements are met, the rental real estate enterprise will be treated as a single trade or business for purposes of the section 199A deduction. Even if all requirements listed below aren’t met, it still may be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations.
The following requirements must be met by taxpayers or a relevant passthrough entity (RPE) to qualify for this safe harbor:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
- For rental real estate enterprises that have 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.
- 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.
- The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon. The statement must include:
- A description (including the address and rental category) of all rental real estate properties that are included in each rental real estate enterprise;
- A description (including the address and rental category) of rental real estate properties acquired and disposed of during the taxable year; and
- A representation that the requirements of this revenue procedure have been satisfied.
The following types of property may not be included in a rental real estate enterprise and are therefore not eligible for the safe harbor:
- Real estate used by the taxpayer (including an owner or beneficiary of an RPE) as a residence.
- Real estate rented or leased under a triple net lease. For purposes of this revenue procedure, a triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees and insurance, and to pay for maintenance activities for a property in addition to rent and utilities.
- Real estate rented to a trade or business conducted by a taxpayer or an RPE.
- The entire rental real estate interest if any portion of the interest is treated as a specified service trade or business.
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