Tax Cuts and Jobs Act: Proposed Rules on QBI for Rental Real Estate

Blog Post Tax Cuts and Jobs Act: Proposed Rules on QBI for Rental Real Estate

Tax Cuts and Jobs Act: Proposed Rules on QBI for Rental Real Estate

February 2019

The IRS has recently provided additional guidance on the Qualified Business Income (QBI) 20% deduction (under Section 199A) for rental real estate enterprises. According to the IRS, a rental real estate enterprise is defined as an interest in real property held for the production of rent. A safe harbor is provided under proposed revenue procedure 2019-07 for rental real estate to be treated as a trade or business for QBI purposes, if certain qualifications are met. For purposes of eligibility for the QBI 20% deduction during the tax year, the enterprise must:

  1. Keep separate books and records that are maintained to reflect income and expenses for each rental real estate enterprise.

 

  1. Perform 250 or more hours of rental services per year for tax years beginning before January 1, 2023 (for tax years beginning after December 31, 2022: any three of the five consecutive years). Services may be performed by owners, employees, agents, and/or independent contractors of the owners.

These rental services include:

  • Advertising to rent or lease the real estate
  • Negotiating and executing leases
  • Verifying information contained in prospective tenant applications
  • Collection of rent
  • Daily operation, maintenance and repair of property
  • Management of the real estate
  • Purchase of materials
  • Supervision of employees and independent contractors

 

Rental services do not include:

  • Financial or investment management activities (arranging financing, procuring property, studying and reviewing financial statements or reports on operations)
  • Planning, managing or constructing long-term capital improvements
  • Hours spent traveling to and from the real estate property

 

  1. Maintain contemporaneous records (starting with tax years beginning after Jan. 1, 2019) that include:
  • Hours of services performed, description of services performed, dates of services performed, and who performed the services.

 

*Real estate that was used as a residence for any part of the year under Code Sec. 280A is not eligible for safe harbor.

 

*Real estate rented or leased under a triple net lease (a lease agreement that requires the tenant or lessee to pay real estate taxes, insurance, and maintenance) is not eligible for safe harbor.

 

*The QBI deduction is currently set to expire after 2025 and revert to pre-Tax Cuts and Jobs Act law.

 

This proposed revenue procedure applies to tax years ending after December 1, 2017 and may be used until the procedure is finalized. Subsequent changes to the proposed revenue procedure could affect the above summary. The new proposed rules were issued on January 18th, 2019. To read the notice in its entirety, visit https://www.irs.gov/pub/irs-drop/n-19-07.pdf.

 

For any questions regarding this information, please reach out to your Richey May tax professional or contact us at info@richeymay.com.