Rental real estate businesses may as well start singing holiday carols as Christmas has come early for their industry. IRS’s recent proclamation (Rev. Proc. 2019-38) has loosened tax regulations on rental real estate businesses with regards to Qualified Business Income (QBI) deductions.

Eligible rental real estate businesses will have the opportunity to deduct 20 percent of their qualified income from their taxable income. According to IRS’s website, it also provides a “deduction of up to 20 percent of aggregate real estate investment trust dividends and qualified publicly traded partnership income”.

Business owners, however, need to be wary of some limitations in the safe harbor. According to an article in the Journal of Accountancy, “a “rental real estate enterprise” is treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise.”

The article written by Sally P. Schreiber further states that “these hours include services performed by owners, employees, and independent contractors and time spent on maintenance, repairs, rent collection, payment of expenses, provision of services to tenants, and efforts to rent the property. However, hours spent in the owner’s capacity as an investor, such as arranging to finance, procuring property, reviewing financial statements or reports on operations, and traveling to and from the real estate, will not be considered hours of service for the enterprise.”

Grouping Of Real Estate Properties For QBIs

Businesses with multiple properties may group them in two categories; residential and commercial. Each group can then be treated as a single enterprise as a basis for its adherence to the provision’s limitations. However, a taxpayer or RPE that chooses to treat its interest in each residential or commercial property as a separate rental real estate enterprise may choose to treat its interests in all similar commercial or all similar residential properties as a single rental real estate enterprise in a future year.

For properties that are used both for multi-purposes, owners have the option to separate it between the two categories. Once placed under a group, it may not, however, be used for another.

Other Rules To Consider

Rental real estate enterprises, likewise, must maintain separate books from their other real estate businesses.  Furthermore, the safe harbor excludes properties leased under triple net leases or used by owners as their residence.  Other requirements of the safe harbor, according to Sally P. Schreiber, includes:

  • The taxpayer must maintain 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 those services were performed, and who performed the services.
  • The taxpayer or relevant passthrough entity must attach a statement to the tax return filed for the tax year(s) the safe harbor is relied upon. This must be done each year.

Compliance by rental real estate enterprises to these regulations shall be determined annually. The new revenue procedure applies to tax periods after December 31, 2017. The principal authors of the provision are Robert D. Alinsky, Vishal R. Amin, Margaret Burow, and Sonia K. Kothari of the Office of the Associate Chief Counsel.