Can you take advantage of the new 199A 20% deduction if you have a rental real estate business?

I discussed earlier the new 20% deduction for businesses under 199A

The rental real estate enterprise business is something that touches a lot of taxpayers. If you have rental property (or properties) hold them out for rent and collect rent you are in the rental real estate enterprise business. There are a lot of challenges to conducting a rental real estate enterprise business, but we aren’t going to discuss those right now.

In order to take advantage of the 199A deduction, you must be conducting a trade or business. Under proposed revenue procedure 26 CFR 1.199A-1, the safe harbor rules for rental real estate businesses are laid out.

What is a rental real estate enterpriseA rental real estate enterprise is an interest in real property held for the production of rents. It can be single property or multiple properties. You must hold the interest (ie be the landlord) or hold it in a disregarded entity separate from it’s owner (ie a property management company). You can’t mix commercial real estate with your residential real estate enterprise in order to comply with 199A. The way you treat your business must be consistent throughout the tax years.

Safe Harbor Rule: A rental real estate enterprise will be treated as a trade or business if: (1) Separate books and records are kept for each enterprise. (2) 250 hours or more of rental services are performed (subject to certain changes after December 31, 2022) (3) You must keep timely records of rental services performed including hours, dates, description and who performed the service.

What other type of rental arrangements are excluded? If you used the rental as a residence during any part of the tax year, you cannot take the 199A deduction. The same applies for triple net leases

How do you elect the safe harbor? A statement attached to the return signed by the taxpayer or authorized representative with penalty of perjury language included. The statement should include a description that you are taking the deduction under 199A or safe harbor rules.

Remember that these are the proposed rules and the final regulations haven’t come out yet. It can be tricky figuring out whether you can comply with the new changes so as always contact me for any assistance that you may need!

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