If you have a rental property, you want to make sure your rental income qualifies for Section 199A. In early 2020, the IRS released Revenue Procedure (“Rev. Proc”) 2019-38. This grants safe harbor for rental real estate, so it qualifies as trade or business. Now real estate businesses can be eligible for the Section 199A deduction.
Pre-requisites For Section 199A
In order to qualify, you must meet several pre-requisites.
- meeting the definition of a rental real estate enterprise
- performing a minimum number of rental services hours
- keeping specific records
The IRS’s definition of a rental real-estate enterprise is an interest in real property held for the production of rents and may consist of an interest in a single property or interests in multiple properties.
250 hours or more of rental services must be done each year for rental real estate enterprises that have not been in existence for four years. For all rental real estate enterprises that have been in existence for four years or more the same rules apply when those four years have included any three of the five consecutive taxable years ending with the taxable year. Furthermore, taxpayers must keep extensive documentation in records and books for each rental real estate enterprise. Specifically, this includes the following information:
- detailed written record of hours
- all rental services that were done throughout the existence of the property
Additionally, you must attach a statement to a return stating reliance on the safe harbor taxable year.
Mixed Use Properties
Without a doubt, one of the more significant and impactful changes from the previous provision (Notice 2019-07) is the treatment of mixed-use properties. The definition for mixed-use property is a single building that combines residential and commercial space. Interest in one such property can be treated the same as a single rental real estate enterprise. Or it may be split into separate residential and commercial interests. If treated in this way, it cannot be part of the same property as other residential, commercial, or mixed-use property.
Certain types of real estate do not qualify for this safe harbor. For example real estate that is used as a personal residence, rented under a triple net lease, or rented to a trade or business conducted by the taxpayer do not qualify.
This provision applies to taxable years ending after December 31, 2017.
In conclusion due care and planning will be needed prior to attempting to take this deduction related to rental real estate income.