IRS Establishes Safe Harbor for Rental Enterprises Under 199A

Posted by Louis DiSarno, CPA on Apr 2, 2019 8:10:00 AM
Louis DiSarno, CPA
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vacant rental room with windows Tax practitioners and industry leaders alike have been offering comments and posing questions to the IRS after the proposed regulations were released for the new Section 199A Qualified Business Income deduction. The IRS has worked diligently to analyze and clarify the new law, and issued final regulations on January 18, 2019.

Final 199A Regulations

Several important provisions were addressed in the new guidance, and the IRS has advised taxpayers that they may rely on the proposed regulations or the final regulations in their entirety.

The final regulations specify that only income from a taxpayer’s “qualified trade or business” is eligible for the 20% deduction. While there was initial ambiguity in the proposed 199A regulations as to what would constitute a “qualified trade or business” if a rental enterprise was concerned, the IRS has issued Notice 2019-07, which has established a safe harbor, under which rental income will qualify for the deduction.

Qualifications for Rental Enterprises & Services

We’ve written previously about this notice in our coverage of Section 199A as a whole. Among other conditions, there must be separate books and records for the rental enterprise, at least 250 hours of “rental services” must be performed in the business, and contemporaneous records must be maintained.

Rental services that qualify can include a variety of activities, and all services may be carried out by an agent or employee of the owner:

  • Advertising the property
  • Maintenance or repair of the property
  • Lease negotiations
  • Rent collections

Special Note: Even an investor-owner in real estate can potentially qualify under this safe harbor.

Meeting Safe Harbor Requirements

The guidance also indicates that even if a rental enterprise does not meet the safe harbor requirements, it may still qualify under the final 199A regulations. Notice 2019-07 also makes clear that property used as a residence by the taxpayer is not eligible for this safe harbor, and neither is a triple-net lease (a lease in which most of the property’s upkeep and maintenance is the responsibility of the lessee), so taxpayers that have such agreements may wish to consult with a tax professional or consider restructuring these agreements.

Coming Soon: Revenue Procedure For Taxpayers

Even with the information contained in the IRS notice, there is still considerable ambiguity and taxpayers have to consider the facts and circumstances relating to their rental businesses. The IRS has indicated that a Revenue Procedure will be forthcoming that will explain the safe harbor more in depth and provide much-needed guidance to taxpayers who are confused by the interaction of rental activity rules and the Qualified Business Income deduction.

Until the additional guidance is issued, MRPR can assist you in determining whether your rental business qualifies. Contact us – we’re here to help you.


Topics: Tax Topics