X
X

Find Your Specialist

X

Contact Us

    Go Back

    Do Your Real Estate Activities Qualify for a 20% QBI deduction?

    If taxpayers carefully follow new IRS rules, their income from rental real estate will be considered qualified business income (QBI) eligible for the 20% deduction. Revenue Procedure 2019-38  finalizes a safe harbor for “rental real estate enterprises” (RREEs), defined as “an interest in real property held to generate rental or lease income.” An earlier article on the proposed  safe harbor explains the requirements in detail. Below is a synopsis of those rules along with information on how to qualify a real estate interest in 2018 and 2019.

    Basic Requirements

    Only individuals are qualified for the safe harbor. Corporations and partnerships are not eligible, but shareholders of an S corporation or the partners in a partnership or LLC can qualify. The following requirements must be met by taxpayers to qualify for the safe harbor:

    • Separate books and records must be maintained 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 must be performed each year. For other rental real estate enterprises, 250 or more hours of rental services must be performed in at least three of the past five years.
    • The taxpayer must maintain contemporaneous records, including time reports or logs, which identify: hours of all services performed; type of all services performed; dates when services were performed; and who performed the services.
    • The taxpayer must attach a statement to the return stating that the taxpayer is relying on the safe harbor. (See requirements below.)

    Asset Classes

    Interests in a single property or interests in multiple properties qualify for the deduction. However, if the RREE consists of multiple properties, they must all be of the same asset class, either residential or commercial. An interest in mixed-use property that combines residential and commercial units may be treated as a single rental real estate enterprise or may be bifurcated into separate residential and commercial interests. Each rental real estate enterprise that satisfies the requirements of the safe harbor is treated as a separate trade or business.

    Tax Return Statement Required

    A taxpayer must attach a statement to its original tax return stating that the taxpayer is relying on the safe harbor for each year the safe harbor is claimed. Because the safe harbor rules were adopted in 2019, taxpayers are allowed to attach the statement to an amended return for tax year 2018. Taxpayers need only submit a single statement, but the statement must list the required information separately for each rental real estate enterprise.

    The statement must include the following information:

    • A description, the address and rental category of all rental real estate properties that are included in each rental real estate enterprise;
    • A description, the address and rental category of rental real estate properties acquired and disposed of during the taxable year; and
    • A representation that the requirements of Rev. Proc. 2019-38 have been satisfied.

    Effective Date

    The contemporaneous records requirement does not apply to taxable years before 2020. However, the IRS reminds taxpayers that they still must prove that they meet the requirements for claiming the QBI deduction for rental real estate activities in 2018 and 2019.

    Related Articles

    • 01.25.2023

      A New Year Means New Privacy Laws

      Ever since the General Data Protection Regulation (GDPR) came into effect in May 2018, US state privacy laws have been passed in Virginia, Colorado, Connecticut, Utah and, most pressing of them all, California. The California Privacy Rights Act (CPRA) went…

      Continue Reading
    • 01.19.2023

      The New Rules Under Section 174

      Internal Revenue Code Section 174 has long been used by taxpayers to deduct certain expenses related to research and experimentation (R&E) in the current year.  The code section was originally enacted in 1954 to eliminate uncertainty in the tax accounting…

      Continue Reading
    • 12.20.2022

      IRS Customer Service May Improve in 2023

      With 4,000 new customer service representatives and plans to hire 700 new Taxpayer Assistance Center (TAC) employees, taxpayers soon may get relief from endless hold times, no in-person help and unresolved problems.

      Continue Reading
    • 12.12.2022

      Reduce Taxable Income with IRA Distributions Transfers

      IRA owners who are age 70½ or over can transfer up to $100,000 per year to charity to reduce their taxable income. These transfers, known as qualified charitable distributions or QCDs, offer end-of-the year tax savings and can count toward required minimum distributions (RMDs) that taxpayers who are age 72 must make each year. Think of it as a tax-free charitable rollover of IRA funds.

      Continue Reading
    • 12.02.2022

      UK R&D Tax Reliefs – Where Are We Now?

      In the November 2022 Autumn Statement, the Chancellor announced significant changes to the current Research and Development (R&D) tax reliefs. The key announcements were a change to the applicable rate of the Research and Development Expenditure Credit (RDEC) and a…

      Continue Reading
    • 12.01.2022

      1099s Required for 2022 Tax Year

      Taxpayers earning income from selling goods or providing services may receive a Form 1099-K, Payment Card and Third-Party Network Transactions, for the first time in early 2023, when the 2022 forms are due. The requirement to file Forms 1099 have…

      Continue Reading
    • 11.28.2022

      IRS Uncovers $3.1 Billion in COVID Fraud

      The IRS Criminal Investigation department (IRS-CI) has partnered with the Justice Department to uncover and prosecute fraudulent activities related to the federal government’s COVID relief programs. To date, the IRS has conducted 840 investigations involving fraud amounts totaling more than…

      Continue Reading
    • 10.25.2022

      IRS Inflation Reduction Act Increases Funds

      The Inflation Reduction Act of 2022, enacted in August, increased funding for the IRS by $80 billion through 2031 for enforcement activities, operations support, systems modernization and taxpayer services. The legislative language, Treasury Secretary Janet Yellen and IRS Commissioner Charles…

      Continue Reading

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled