Tax Deductions: Safe Harbor for Rental Real Estate Businesses

 Posted on February 22, 2019 in Taxation Law

Under the Tax Cuts and Jobs Acts of 2017, certain owners of rental properties may be eligible for a significant tax deduction. The law allows for a 20 percent deduction against “qualified” business income for pass-through businesses. In determining whether someone qualifies for this deduction, a key consideration is whether the taxpayer engages in a “qualified trade or business” for purposes of Section 199A of the Internal Revenue Code. In some cases, it can be difficult to determine whether a business meets these qualifications, and the IRS has issued additional guidance about safe harbor for rental real estate businesses.

Qualifying for Safe Harbor

According to the IRS, the 20% qualified business income (QBI) deduction can only be taken against business income, rather than real estate investments. To achieve the required classification as a qualified trade or business, the IRS has set forth two major requirements for owners of rental real estate.

First, real estate property must be directly owned by an individual taxpayer or by an eligible pass-through entity. Second, the taxpayer must document 250 hours of rental services each year. Rental services encompass numerous activities, such as arranging advertising, collecting rent, supervising employees, and performing maintenance. Such activities that are performed directly by the owner or by an employee, agent, or independent contractor on behalf of the business will count toward the 250-hour requirement.  

This new clarification may put some rental real estate owners in a difficult position. Typically, real estate owners classify each rental property as a distinct enterprise in order to preserve flexibility. In these circumstances, each entity will have to prove 250 hours of rental services per year. 

Rental real estate owners may be enticed by the 20 percent QBI deduction to re-structure their rental real estate business so it will qualify for the deduction. However, this is just one consideration surrounding the most recent clarifications on the IRS rules, which is why it is important to work with an experienced attorney to determine the best way to take advantage of the available deductions.

Consult With a San Jose, CA Real Estate Tax Lawyer

If you have questions about this real estate tax law or any other tax rules that may affect your business, you should contact a qualified San Jose tax attorney. Failure to comply with IRS laws may mean that you are exposed to legal liability. In addition, not leveraging tax laws to your benefit can also be a costly mistake.

It may be the case that small changes could mean that your tax liabilities can be substantially decreased. To learn more, call the tax attorney at the John D. Teter Law Offices at 408-866-1810. 

Sources:

https://www.irs.gov/pub/irs-drop/n-19-07.pdf