199A Safe Harbor Rule

Landlords: Review the new 199A safe harbor rule

Owners of pass-through entities (S corporations, partnerships and limited liability companies) and sole proprietors can benefit from a new deduction under Section 199A of the tax code. And now the IRS has issued new final regulations providing greater clarity that includes a safe harbor rule for rental real estate activities.

Why it matters to landlords

Generally, the deduction is equal to 20 percent of your qualified business income (QBI) for the year, including your net income from an active trade or business. However, the deduction is phased out based on income levels and whether or not you’re a taxpayer in a specified service trade or business (SSTB), such as an accountant, doctor or lawyer. Other limits based on wages of non-SSTB taxpayers may apply.

Previously, it wasn’t entirely clear how these rules would apply to rental real estate activities, but the clarifications provide a safe harbor rule for landlords. Essentially, a rental activity (including multiple activities combined in a single enterprise) is treated as trade or business if:

  • You keep separate books and records for each activity or combined enterprise;
  • You perform 250 hours or more of rental services for the activity or combined enterprise; and
  • You maintain the proper contemporaneous records and time reports.

On the other hand, certain rental activities are excluded from the safe harbor rule, including real estate used as your home and property rented on a triple net lease basis. With this type of lease, the tenant is typically responsible for real estate taxes, building insurance and common areas.

If you have questions about your rental real estate activities, call today.