Qualified Business Income (QBI) for Rental Property Business, New Safe Harbor Offers Taxpayer Benefits
The IRS issued a new revenue procedure applicable to QBI deductions for rental property businesses. This new revenue procedure allows taxpayers to treat rental real estate businesses as a trade or business for QBI deduction purposes by applying the safe harbor rule.
What Does the Safe Harbor Qualification Mean?
The safe harbor qualification offers taxpayers a financial benefit with respect to their rental real estate enterprises. It also comes under a safe harbor arrangement if an enterprise performs a minimum of 250 service hours every tax year. Enterprises at least four years old qualify if they perform 250 hours in three of the last five tax years.
What Do Service Hours Include?
Service hours include any services carried out by employees, owners, or independent contractors. They also include time spent repairing, maintaining, collecting rent, paying expenses, and providing services for tenants. Also included is any time spent trying to rent out the property.
What Do Service Hours Not Include?
The qualification does not include any hours spent on arranging financing, procuring properties, reviewing financial records or operational reports. Those hours also include any time spent traveling to or from the property.
What Is the Definition of Rental Real Estate Enterprises?
For this safe harbor qualification, the definition of rental real estate enterprises is:
“A real property which is held to produce rent.”
Rental real estate enterprises could consist of several properties. However, the interest must be directly held by the taxpayer or by a disregarded entity. A taxpayer must also treat all properties held to produce rent as a separate enterprise. Alternatively, the taxpayer must treat all similar properties as one enterprise. Also, residential and commercial real estate cannot be combined within a single enterprise.
Safe Harbor Requirements
This safe harbor qualification for QBI deductions for rental property enterprises has several requirements, including:
- Maintaining and keeping separate records and books for the real estate rental enterprise.
- Any property in the residential use of the taxpayer or leased under the triple net lease is not eligible.
- Taxpayers must maintain contemporaneous records, including time logs and reports for service hours performed. Also descriptions of services performed, along with dates and the names of those performing them, must be kept.
- Taxpayers must attach statements to their tax returns. They must do this for each year they intend to rely on the safe harbor.
- This safe harbor will be effective for any tax year ending after Dec. 31, 2017.
- The requirement for contemporaneous records does not apply to any tax year commencing before Jan. 1, 2020. However, taxpayers must still prove they have entitlement to any tax deductions they have claimed.
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