The final IRS regs were released today.
Before Today: If you participate regularly in your rentals with the intent of making a profit you will likely qualify for the 20% deduction.
After Today: If you spend 250 hours a year on your rentals, don’t mix commercial and residential, track your hours, and keep separate books you qualify because of the new Safe Harbor.
if you don’t spend 250 hours on your rentals- you still qualify using that first way we’ve had all along.
So basically- the IRS just created a very complex way to qualify for something you likely already qualified for.
Don’t worry - I created a chart to help you figure it out.
Allows Individuals and RPEs (Relevant pass through entities) to claim 199A deduction with respect to a rental real estate enterprise.
A Rental Real Estate Enterprise is defined as an interest in real property held for the production of rents and may contain multiple properties.
The individual or RPE must hold the property directly, or through a disregarded entity
Taxpayer must either treat each property as a separate enterprise, or combine all similar properties together as an enterprise.
You can not combine residential and commercial Real estate in one enterprise.
You must keep separate books and records for each enterprise
You must spend 250 hours per year in the rental enterprise
You must maintain logs of all hours, services performed, dates, and who performed them
You can have employees and property managers act on your behalf.
What activities qualify for the 250 hours needed?
Advertising to rent or lease the property
Negotiation and executing leases
Verifying information contained in prospective tenant applications
Collection of rent
Daily operation, maintenance, and repair of the property
Management of the real estate
Purchase of materials
Supervision of employees and Independent contractors
What activities Don’t qualify for the 250 hours needed?
Financial or investment management activities
Studying and reviewing financial statements or reports
Planning, managing, or constructing long-term capital improvements
Hours spent traveling to and from the real estate
What else should I know about the Safe Harbor?
Real estate used by the taxpayer as a resident for ANY part of the year under section 280A is not eligible for the safe harbor.
NNN properties do not qualify
To claim the safe harbor the Taxpayer must include a statement to the tax return on which it claims the 199A deduction. The statement is required to be signed by the taxpayer and must meet specific wording confirming the facts to the true and relevant.
The activities that qualify for the hours for the 199A safe harbor are NOT the same as the activities that qualify for the hours required to qualify as a Real Estate professional.