If the IRS safe harbor requirements are met, a real estate rental interest will be treated as a single trade or business for purposes of the Section 199A deduction. The safe harbor is available to taxpayers who seek to claim the Section 199A deduction in regards to a “rental real estate enterprise,” which is defined as an interest in real property that is held to generate rental or lease income. The taxpayer or relevant pass-through entity (RPE) must hold each interest directly or through an entity that is disregarded as a separate entity from its owner (i.e., a single member limited liability company).
The following requirements must be met to qualify for this safe harbor:
- Maintained separate books and records to reflect income and expenses for each real estate rental enterprise;
- For rental real estate enterprises that have been in existence for less than four (4) years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in three (3) of the last five (5) years.
- Taxpayer maintained contemporaneous records, including time reports, logs, or similar documents that include:
- Hours of all services performed
- Description of all services performed
- Dates on which such services were performed
- Who performed the services
- Taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.
If the above requirements are not met, the real estate interest may still be treated as a trade or business for the Section 199A deduction if it meets the definition of a trade or business under the Section’s regulations.
If you need tax preperation assistance and would like to speak to an attorney, call our law office at 816-524-4949 or visit our website at Hoorfarlaw.com.