If you are a business owner, the buzz around the Qualified Business Income Deduction has been apparent since the beginning of the tax law changes. If you have any interest in rental real estate, the buzz around the QBI deduction has lingered quite some time as the Treasury Department and IRS have just released new revenue procedures regarding the activity and it’s eligibility for the deduction.
A revenue procedure has been issued that provides a safe harbor for certain rental real estate enterprise taxpayers regarding the qualified business income deduction (QBI). This safe harbor allows rental real estate enterprises to be treated as a trade or business.
For safe harbor purposes, a rental real estate enterprise is defined as “an interest in real property held for the production of rents and may consist of an interest in a single property or interests in multiple properties”.
This safe harbor election must be made annually following these requirements:
– Separate books and records are kept to report income and expenses for each rental real estate enterprise
– If the rental real estate enterprise is less than four years old, 250 or more hours of rental services must be performed per year
– If the rental real estate enterprise has been in operation for 4 years or more, in any three out of the five consecutive taxable years, 250 or more hours of rental services are performed
– Contemporaneous records MUST be kept and MUST be reasonable. This includes reports that include hours, descriptions, dates, and by whom services were performed.
o Hours include services performed by owners, employees, and independent contractors
o Services include maintenance, repairs, rent collection, payment of expenses, etc.
– A statement attached to the tax return that includes a description/address of the rental real estate properties, if there were any acquisitions/dispositions, and a representation that all requirements were met.
Taxpayers who real estate business does NOT meet the safe harbor may still qualify as a trade or business if it otherwise meets that definition under Sec. 199A regulations.