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Safe Harbor for §199A Rentals

TaxGuyBill
Level 15

I haven't read it yet, but hot off the press:

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


.03 Safe harbor. Solely for the purposes of section 199A, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the taxable year with respect to the rental real estate enterprise:

(A)  Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
(B)  For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed (as described in
this revenue procedure) per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in
any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental real estate enterprise; and
(C)  The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.
.

EDIT:  They also released the Final Regulations for §199A.
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Ernie
Level 9

Thanks Bill! I copied it to read further.

View solution in original post

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18 Replies 18
IRonMaN
Level 15
Thanks - I hope it wasn't so hot that you burnt your hands taking it off of the press.
ACME Taxes, Tatoos, Tires and Tomatoes (I had to get rid of the turtles - they kept running away)
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itonewbie
Level 15
Thanks, Bill!  Will read through this in more details.  Glad the IRS is providing a safe harbor for this.
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Still an AllStar
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Marc-TaxMan
Level 8
But the odd part:   Rental services may be performed by owners
or by employees, agents, and/or independent contractors of the owners.
WHAT:  My Property Manager's time counts as my time?!!  But he will not keep and send me a time log
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TaxGuyBill
Level 15
Insist on the property manager keeping track of his time, or find a new property manager.
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Marc-TaxMan
Level 8
the whole 247 pages Final 199A:  https://www.irs.gov/pub/irs-drop/td-reg-107892-18.pdf
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Marc-TaxMan
Level 8
OMG:  Compliance time with 199A per Reg:  Estimated total annual reporting burden estimated average of 2.5 hours.
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IRonMaN
Level 15
That’s government time.  Those of us in the real world perform the work in a fraction of that time.
ACME Taxes, Tatoos, Tires and Tomatoes (I had to get rid of the turtles - they kept running away)
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Clarification: question: a person has residential rentals AND farm land rentals. Taxpayer does meet the 250 hours worked on residential rentals, but only 12 hours worked in farm land rental (clearing brush,meetings with tenant,looking at the land).
Because taxpayer meets the 250 hours on residential rentals, do you think this 250 satisfies ALSO for farm rent?
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TaxGuyBill
Level 15
It says that the properties must be "similar", and that Residential and Commercial are NOT part of the same "enterprise" for the 250 hours.  So in my opinion, rental of land would NOT be part of the same "enterprise" as residential for the 250 hours.
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thank you! I didn’t think about the rentals being different enterprises...
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MrMojo
Level 3
www.thetaxadviser.com/news/2019/jan/sec-199a-qbi-deduction-xxxxxxxxx.html

"A rental real estate enterprise is defined, for purposes of the safe harbor, as an interest in real property held for the production of rents. A rental real estate enterprise may consist of multiple properties. The interest must be held directly or through a disregarded entity. Taxpayers either must treat each property held for the production of rents as a separate enterprise or must treat all similar properties held for the production of rents as a single enterprise.
"Commercial and residential real estate cannot be combined in the same enterprise"."

The last sentence disqualifies a 'rental' property for QBID if it's Mixed.

How many taxpayers actually keep some sort of log? Or have separate bank accounts for each property?
250 hours/year ~5 avg hours/week/21 avg hours/month are relatively reasonable for time spent for rental real estate activities, though some rental owners may not even put in that much time, depending on the owners, as it depends on facts and circumstances for Each taxpayer.

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itonewbie
Level 15
"How many taxpayers actually keep some sort of log?"
That's why the Notice waives that requirement for 2018, so that people can start doing it from now on.

"Or have separate bank accounts for each property?"
To be precise, it's for each enterprise, so it doesn't have to be for each property.  In any case, maintaining separate books and records is not a new requirement from the IRS for a qualified business (e.g. QBU) and it's a best practice anyway.

"some rental owners may not even put in that much time, depending on the owners"
This is really a slack that the IRS has cut for many taxpayers, especially since time spent by the owner's employees, agents, and contractors will all count.  All that it takes now is to start a log and ensure these other people the owner engages will comply.
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Still an AllStar
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aahelper
Level 1
Thank you so much Bill!!
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Ernie
Level 9

Thanks Bill! I copied it to read further.

View solution in original post

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Greta
Level 7
My clients do not keep separate bank accounts or keep track of time spent. Often the rentals produce a loss. These guidelines seem to indicate that the rentals are not eligible for a 199A calculus, and I can then use only their Sch C income to arrive at the 20% deduction?
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Terry53029
Level 12
Level 12
you should read the entire article before you see clients. from the actual article "The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019"
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TaxGuyBill
Level 15
This is also just a "Safe Harbor", which means that if the requirements are met, the IRS will not even question it.


It also says "Failure to satisfy the requirements of this safe harbor does not preclude a taxpayer from otherwise establishing that a rental real estate enterprise is a trade or business for purposes of section 199A."

So if the Safe Harbor is NOT met, it still MIGHT qualify, but the IRS will look at the specific facts-and-circumstances at it.
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itonewbie
Level 15
I'd also add that people should not flip flop and take inconsistent positions on an activity depending on whether it is beneficial for a particular year.
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Still an AllStar
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