Prior to Notice 2019-07, many taxpayers were uncertain as to whether all rental real estate activities were encapsulated by the language of the recently-enacted section 199A of the Tax Cuts and Jobs Act (TCJA). The Treasury Department issued a revenue procedure on Friday, January 18, 2019, which outlines safe harbor rules, in hopes of bringing some clarity to the matter. The notice clarifies that if a rental real estate enterprise does not meet the safe harbor rules enumerated in the notice, then the activity may still qualify for the section 199A deduction, should it meet the following definition of a trade or business:
“…any trade or business other than a specified service trade or business, or the trade or business of performing services as an employee.”
So What Is a “Rental Real Estate Enterprise?”
For the purposes of section 199A, a rental real estate enterprise is defined as “an interest in real property held for the production of rents and may consist of interest in multiple properties;” however, “commercial and residential real estate may not be part of the same enterprise.”
Should a rental real estate enterprise satisfy all of the following safe harbor rules, the enterprise will, as a matter of fact, qualify for the section 199A deduction.
- Separate books and records must be maintained for each rental real estate enterprise.
- For years beginning January 1, 2018 through January 1, 2022, a minimum of 250 hours must be spent performing rental services, as defined by Notice 2019-07, with respect to the rental enterprise in the given year. For taxable years beginning after December 31, 2022, the performance of 250 hours is required in any three of five consecutive years rather than on an annual basis.
- Contemporaneous records must be maintained, which constantly and consistently track: the hours of services performed, descriptions of the services performed, dates on which the services were performed, and who performed the services; however, the requirement to maintain contemporaneous records only applies to tax years beginning prior to January 1, 2019.
Certain actions or circumstances may exclude the rental real estate enterprise from being able to satisfy the safe harbor rules. As specified in the revenue procedure, these exclusions include whether the rental property was used as a personal residence at any time during the year or if the rental property was leased under a triple net lease.
How Do You Present the 199A Deduction?
Logistically, the taxpayer must attach a statement to their tax return, which claims the section 199A deduction and confirms that the specified information satisfies the safe harbor rules. Further, the following statement must be attached to their return as a method of asserting their satisfaction of the safe harbor rules:
“Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”
The determination as to whether a rental real estate enterprise has satisfied all the above requirements may be rather complex. For guidance on this matter, please reach out to Terence M. Sullivan Jr, CPA, MST, MBA or your Aronson tax professional at 301.231.6200.