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Rental Property Owners – Read This

I wanted to reach out to my rental clients and inform you of some recent tax law updates that apply to taxpayers who own rental property.  Certain requirements must be met so that you can include your rental activity income for the purposes of calculating the Qualified Business Income (QBI) deduction.  In general, the QBI deduction under Section 199A provides a deduction to non-corporate taxpayers of up to 20% of the taxpayer’s qualified trade or business income.  For landlords, the following rules apply in determining if your rental activity can be defined as a trade or business, and as such, may qualify for the QBI deduction (subject to other limitations that I won’t go into here).  Per IRS Notice 2019-07, Effective 1/1/18 unless noted below:

  • Separate books and records are maintained to reflect the income and expense for each rental real estate enterprise
  • In order for your rental activity to be determined a trade or business, you must spend 250 or more hours per year with respect to the rental enterprise for tax years prior to January 1, 2023
    • For taxable years after December 31, 2022, you must provide 250 or more hours per year in any three out of five consecutive taxable years, or in each year if the enterprise is held for less than five years.
    • Beginning January 1, 2019, you must maintain contemporaneous records of the rental services provided (in an ongoing daily log, like your mileage log) including time reports, logs or similar documents including the following:
      • Hours of all services performed
      • Dates on which services were performed
      • Description of services performed
    • Rental services include advertising, negotiating leases, tenant verification and background checks,  collection of rent, daily operation, maintenance and repairs, purchase of materials, supervision of employees and contractors.  Rental services do NOT include any financial or investment management services, e.g., reviewing financial statements or operational reports, arranging financing, purchasing property, planning or managing long-term improvements to the property, or time spent traveling to or from the property.
  • Real estate used by the taxpayer as a residence for any part of the year is NOT eligible for this safe harbor.
  • Real estate rented or leased under a triple net lease is also NOT eligible for this safe harbor (triple net lease defined as a lease agreement that requires the tenant or lessee to pay taxes, fees and insurance, and is responsible for the maintenance activities for a property in addition to rent and utilities).

This revenue procedure just came out, so I am sorry I was unable to give you any further notice about these requirements.  There will be an affidavit type form included in your 2018 tax return which will attest that you have met the 250 hour rule and other requirements listed above for the 2018 tax year. 

I know I might not see most of you until March or later. I wanted to get this out to you so you can begin to compile your “contemporaneous” logs documenting your 250 hours of rental services for the 2019 tax year and will be prepared in the event of an audit.  These rules are currently slated to run through 2025. 

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