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by Logan Ransley April 14, 2019 3 min read

What is Notice 2019-07? 

Under the Tax Cuts and JobsAct introduced in 2017, a new tax deduction was put in place that all landlords should know about. The qualified business income (QBI) deduction provides eligible taxpayers with a tax cut equal to 20 percent of their QBI. To be eligible for the 20 percent deduction, your rental real estate enterprise has to be considered a “trade or business”.

Paying less tax - this all sounds great! But how do you know if your rental enterprise will meet the threshold? Whether a rental real estate enterprise qualifies as a trade or business has been a source of uncertainty for many in the landlord game. Luckily, the IRS recognized this and has come to the rescue…

IRS Notice 2019-07 provides a safe harbor for individuals and owners of pass-through entities who seek to claim the deduction for a rental real estate enterprise. Essentially this means, if you meet the requirement of the safe harbor, you will qualify for the 20 percent deduction.

Related: Who wins with the New NY Rental Regulations

How Do I Know If My Rental Enterprise Is Covered By The Safe Harbour?

To be considered a “trade or business” under the safe harbor, your rental real estate enterprise must meet the requirements set out in the proposed revenue procedure of the notice.

For the purposes of section 199A of the Internal Revenue Code, a rental real estate enterprise will be treated as a trade or business if these requirements are met during the taxable year:

  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
  • For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed (as described in the revenue procedure) per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental real estate enterprise; and
  • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following:
    (i) hours of all services performed;
    (ii) description of all services performed;
    (iii) dates on which such services were performed; and
    (iv) who performed the services.
    • The records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

    Don’t meet all the requirements to qualify for the safe harbor? A rental real estate enterprise may still be considered to be a “trade or a business” if the rental enterprise otherwise meets the definition of trade or business in sections 1.199A-1(b)(14).

    What Are ‘Rental Services’?

    I know what you must be thinking - “I easily spend over 250 hours on my rental per year!” But be careful - not all hours you spend on your rental will be considered “rental services”. However, rental services can be performed by people other than yourself (think employees, agents, and independent contractors) so if you are short on time, ask others to help out.

    “Rental services” include:

    • advertising to rent or lease the real estate;
    • negotiating and executing leases;
    • verifying the information contained in prospective tenant applications;
    • collection of rent;
    • daily operation, maintenance, and repair of the property;
    • management of the real estate;
    • purchase of materials; and
    • supervision of employees and independent contractors.

      However, “Rental services” do not include:

      • arranging finance;
      • procuring property;
      • studying and reviewing financial statements or reports on operations;
      • planning, managing, or constructing long-term capital improvements; or
      • hours spent traveling to and from the real estate.

      Related: Who wins with the New NY Rental Regulations

      Are There Any Other Limitations I Should Know About?

      Before you start leaping for joy and counting the moolah you didn’t know you had, do note that there are some activities that are excluded. If you reside in your real estate rental for any part of the year, you will be blocked. Real estate rented or leased under a triple net lease is also not included and this may have big practical implications for landlords. Pay careful attention to lease terms as these may have to be renegotiated if you want to take advantage of the 20 percent deduction available to your fellow landlords. If you haven’t already, we recommend checking out IRS Notice 2019-07 for yourself.

      We hope you found this blog interesting! However, do note that it should not be used as a substitute for competent legal and/or other advice from a licensed professional.

      Logan Ransley

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