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The Tax Cut and Jobs Act of 2017 added Code Section 199A, which provides a deduction for 20% of qualified business income. Proposed regulations issued in August 2018 did not address whether real estate rentals would qualify for the deduction. The IRS has now issued temporary guidance on real estate rentals in Notice 2019-7.
The Notice provides a safe harbor for treating a "rental real estate enterprise" as a qualified business for the Section 199A deduction. A real estate rental enterprise is an interest in real estate held for the production of rents and that is either held directly by the owner or an entity disregarded from its owner. It may consist of multiple properties, but commercial and residential property cannot be part of the same enterprise. Even if a property does not meet the safe harbor requirement, it may still be treated as a qualified business if the general criteria are met. However, meeting the safe harbor requirements means that a taxpayer can rely on the property qualifying for the deduction (subject to other limiting factors).
To meet the safe harbor requirements, three criteria must be met-
1) Separate books and records must be maintained to reflect income and expense for each rental enterprise;
2) 250 hours of rental services must be performed each year. These services may be performed by either the owner or others, or both, and include advertising, negotiating and executing leases, collecting rents, operating and maintaining property, and supervising employees and contractors. It does not include financial or investment management activities, such as procuring property or arranging financing.
3) Beginning in 2019, the taxpayer must maintain contemporaneous records of time spent on rental services, and such records must be made available to the IRS.
In addition, a statement made under penalties of perjury must be attached to the taxpayer's return attesting that the above requirements have been met.