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IRS Finalizes Rental Real Estate Section 199A Safe Harbor

  • November 20, 2019 by hamiltontharp
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On September 24, 2019, the IRS issued Revenue Procedure 2019-38 finalizing safe harbor allowance of rental real estate for the purpose of Section 199A deduction.  If all the safe harbor requirements are met, a rental real estate enterprise will be treated as a trade or business and the related rental income will be eligible for the 20% Section 199A deduction, subject to possible limitations.

The Revenue Procedure clarified that the following requirements must all be met by taxpayers or relevant passthrough entities to qualify for safe harbor –

  • Income and expenses for each rental real estate enterprise must be maintained on separate books and records.
  • If the rental real estate enterprise has been in existence for less than four years, 250 or more hours of rental services must be performed per year.  If the rental real estate enterprise has been in existence for four or more years, 250 or more hours of rental services must be performed in at least three of the past five years. The rental services can be performed by owners, employees, agents, or independent contractors.

Rental services that count toward the 250 hour requirement include:

  • Advertising to rent or lease the property
  • Rent collection
  • Managing the property
  • Verifying tenant application
  • Repair and maintenance of the property
  • Daily operations
  • Negotiating leases
  • Purchasing materials or supplies
  • Supervising employees or independent contractors

Activities that do not qualify as rental services include:

  • Researching and purchasing the property
  • Financial or investment services
  • Arranging financing
  • Preparing or reviewing financials statements or operating reports
  • Planning long-term capital improvements
  • Traveling to or from the property
  • Beginning in 2020, contemporaneous documentation must be maintained documenting the following to satisfy the 250 hour requirement:
    • Name of service provider
    • Description of services
    • Dates services were performed
    • Hours of services

If you have questions about the safe harbor requirements, call us today.

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