Since the passage of the Tax Cuts & Jobs Act of 2017, there has been much ado regarding the Section 199A Qualified Business Income tax deduction. Most issues have been addressed and clarified, but there still remains confusion among real estate investors who rent multiple properties, courtesy of a wide range of criteria that must be considered.
First off, an investor or investors’ real estate activity needs to rise to the level of a trade or business in order to qualify for the Section 199A deduction. They must be able to prove they engage in the rental of multiple properties on a regular basis in pursuit of profit. A casual investor who rents out property “sporadically” or uses the property for a residence or vacation home on a part-time basis will likely not qualify.
For real estate investors who have multiple properties being rented out through multiple entities, Section 199A regulations allow for an aggregated group of multiple trades or businesses to be treated as one trade or business in order to qualify for the Section 199A deduction. It is important to note that residential rentals and commercial rentals generally cannot be grouped together because they are not the same type of property.
If the various trades or businesses focus on either residential or commercial properties, a few requirements must also be met to aggregate. The same person or group of people must own 50% or more of each trade/business. The ownership must exist for the majority of the taxable year and all items attributable to each trade or business must be reported on returns within the same taxable year. Also, the trades or businesses must not include any “out of favor” service trades or businesses. This refers to trades or businesses which rely on “a skilled service” to earn profits.
The IRS also offers an optional rental “safe harbor” to deem rental activities eligible for the Section 199-A deduction. Requirements are nuanced, and also exclude certain rental real estate arrangements from rental “safe harbor.” Most notably, they exclude real estate rented or leased under a triple net lease, defined as a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance and to be responsible for maintenance activities for a property in addition to rent and utilities.
As with any section of the tax code, the requirements listed in this blog are just the broad brush strokes. Visit www.irs.gov for complete details or speak to a tax saving professional for tax information targeted for your trade or business. With a 20% tax deduction dangling like a carrot on a stick, we think it’s worth the effort.
In any case, if you have questions or would like to discuss Section 199-A and how it may apply to your circumstance, call Tax Saving Professionals at 772-257-7888 or use our convenient Contact form to schedule an appointment. And remember, "It's your money, We'll help you keep it."