Safe Harbor for Real Estate QBID Deductions: Finalized Rules
Originally published on October 7, 2019
Updated on November 1st, 2023
The IRS last month finalized new rules (Rev. Proc. 2019-38) regarding the safe harbor for treating a rental real estate enterprise (RREE) as a trade or business. This classification allows owners of such enterprises to qualify for the section 199A qualified business income deduction (QBID).
The new rule falls under Notice 2019-07, which was released in January 2019. (Click here to see more details about this notice.) The new proclamation officially implements the safe harbor granted in the original notice. While most of the rule is as stated in the January announcement, there are a few changes and other points to consider:
- The original notice stated that a signed statement must be attached to your income tax return indicating that a taxpayer had met the safe harbor requirements. While the statement is still necessary, it no longer has to be signed.
- The contemporaneous recordkeeping requirements regarding independent contractors are less stringent; however, they are still necessary. The new revenue procedure indicates that if employees or independent contractors perform rental services, taxpayers must keep additional records including an allocation between the rental services and other services performed by the employees or independent contractors, along with time/wage or payment records.
- Mixed-use properties that consist of both commercial and residential rental activities can be treated as a single rental real estate enterprise. However, if it is treated as a single RRRE, it cannot be combined with other properties. Taxpayers have the option to split mixed-use property into commercial and residential components. If a taxpayer does this, the individual components could be combined with other properties of the same asset class (commercial vs. rental).
- While the 250-hour per year service requirement for each rental real estate enterprise faced heavy criticism, the IRS chose to keep this aspect of the new rule.
The safe harbor rule is effective for tax years ending after Dec. 31, 2017. Because the final revenue procedure differs from the proposed revenue procedure, taxpayers may rely on Notice 2019-07 for the 2018 tax year. The contemporaneous records requirement does not apply to tax years beginning before Jan. 1, 2020, but taxpayers are reminded they must prove they are entitled to any tax deduction they claim.
The Rev. Proc. 2019-38 safe harbor is nonexclusive. Therefore, taxpayers with rental real estate who don’t meet the safe harbor requirements still may be able to take the 199A deduction. Real estate CPAs are well versed in safe harbor requirements and guidelines for other tax advantages available to you. Contact James Moore for help in navigating these opportunities so you can get the most out of your return.
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