The IRS issued Revenue Procedure 2019-38 on September 24th, 2019, finalizing a safe harbor under Section 199A for rental real estate owners to claim a qualified business income deduction of up to 20%.
Defining “Rental Real Estate Enterprise”
For the real estate business to qualify for the safe harbor, it must meet the definition of a “rental real estate enterprise” under Section 199A. In this instance, the IRS defines rental real estate enterprise as an interest in real property held to generate rental or lease income. The interest can be in a single property or interests in multiple properties. Additionally, an interest in mixed-use property can be treated as a single rental real estate enterprise or be separated into residential and commercial interests.
Requirements to Qualify for the Safe Harbor
Taxpayers or RPEs must meet the following requirements to qualify for the safe harbor:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
- For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For rental real estate enterprises that have been in existence at least four years, in any three of the five consecutive tax years that end with the tax year, 250 or more hours of rental services are performed per year with respect to the rental real estate enterprise.
- The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents for:
- Hours of all services performed
- Description of all services performed
- Dates on which services were performed
- Who performed the services
- The taxpayer or RPE attaches a statement to a timely filed original return for each tax year in which the safe harbor is relied upon. The statement may also be attached to a 2018 1040X.
A taxpayer is not precluded from otherwise establishing trade or business status independent of this safe harbor.
Effective Tax Years
The safe harbor is effective for tax years ending after December 31, 2017. Taxpayers may rely on Notice 2019-07 for the 2018 tax year. The contemporaneous records requirement only applies to tax years beginning after January 1, 2020.