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Notice 2019-07 - IRS Rental Property Safe Harbor Guidelines

Notice 2019-07 - IRS Rental Property Safe Harbor Guidelines

Under the 2018 Tax Cuts & Jobs Act (TCJA) passed in December of 2017, Congress gave certain  businesses (excluding C Corporations) the potential to receive a deduction of up to 20% of their Qualified Business Income (QBI) under Internal Revenue Code Section 199A.  This deduction is commonly referred to as the Qualified Business Income (QBI) deduction.  The Act raised many questions related to the QBI, including whether real estate rental activity qualifies for the deduction.

The issue revolves around whether the rental activity rises to the level of being a trade or business activity.  In response to the many comments received by the Internal Revenue Service (IRS) regarding this issue, the IRS issued Notice 2019-07. The Notice was issued to provide taxpayers with safe harbor guidelines under which the real estate activity will be treated as a trade or business for QBI deduction purposes.

In general, the safe harbor requirements are as follows:

  1. Separate books and records must be maintained to reflect income and expenses for each rental activity.
  1. At least 250 hours of rental services are performed annually for taxable years prior to January 1, 2023. For years after 2022, any three out of five consecutive years must meet the 250 hours requirement. Rental services may include: advertising; lease negotiation; tenant application and rental collection and operations; management and supervision of employees or subcontractors. However, rental services do not include financial or investment management, arranging financing, procuring property or long-term capital improvements management as outlined in the chart of Qualifying and Non-Qualifying Rental activities.
  1. Contemporaneous records must be maintained regarding rental services beginning in 2019. The record keeping is not applicable for 2018. The records should include the following:
    1. Hours of all services performed
    2. Description of all services performed
    3. Dates on which services were performed
    4. Who performed the service

If the real estate was used by the taxpayer as a residence for any part of the year, the taxpayer cannot use the safe harbor. Triple net leases also do not qualify for the safe harbor.  As a reminder, triple net leases are leases requiring the tenant to pay a portion of taxes, fees, insurance and maintenance. Taxpayers must treat each property separately or treat all similar properties as one.  Commercial and residential properties may not be combined as similar properties.

Please note that if the taxpayer does not qualify using the safe harbor, it does not automatically preclude the rental activity from being treated as a trade or business for purposes of the QBI deduction. Careful planning should be directed towards restructuring the lease agreement so that the lease does not qualify for a triple net lease. While the safe harbor gives certain taxpayers a bright-line test to follow, there are still rental activities that will need to be evaluated to determine if they are eligible for the QBI deduction.

For more information, please contact a member of the Herbein tax team, or email us at info@herbein.com.

Article written by: Steve M. Wolf

List of Services to determine if the services meet the Rental Property Safe Harbor requirements under Revenue Procedures 2019-07:

Qualifying Rental Activities

Non-Qualifying Rental Activities

Negotiating leases and verifying information contained in prospective tenant applications

Time spent traveling to and from the real estate

Daily operations, maintenance and repairs

Procuring property

Advertising to rent or lease the real estate rental

Reviewing financial Statements

Management of the real estate

Planning and managing long term capital improvements

Collection of rent

Other financial or investment management activities

Purchase of materials

Arranging financing

Supervision of employees and independent contractors