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The Tax Cuts and Jobs Act allows for a potential 20 percent tax deduction for qualified business income generated from pass-through entities for tax years beginning after Dec. 31, 2017 (IRC Sec. 199A). The deduction is only applicable to pass-through entities that conduct a trade or business. Therefore, under the original law, it was uncertain if rental real estate entities leasing to third parties would qualify for this deduction. 

The IRS recently released Notice 2019-7 to provide additional guidance on rental real estate entities. The Notice allows taxpayers to make a safe harbor election to treat their third party rental real estate entities as a trade or business for purposes of IRC Sec. 199A. In order to qualify for the safe harbor election the below criteria must be met: 

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. 
  • Engage in 250 or more hours of rental services per year. Rental services include: advertising, negotiating and executing leases, processing tenant applications, collection of rent, daily operation/maintenance/repair of the property, and supervision of employees. Services can be performed by owners, independent contractors, or employees.
  • The rental real estate entity is not subject to a triple net lease. A triple net lease is a lease agreement which requires the tenant or lessee to pay taxes, fees, insurance, and maintenance for the property.

The rental real estate enterprise election must be made on the tax return and the entities must maintain records of the rental services performed. If the real estate entity does not qualify for the safe harbor election, it not does necessarily mean they will not qualify for the 20 percent tax deduction. For more information on the safe harbor election and the implications of the Tax Cuts and Jobs Act, please contact us at one of our many locations