The IRS has recently provided clarity for owners of rental properties on how they can qualify for the new 20% pass through deduction.
As per the IRS, in order to qualify for the new 20% pass through deduction, an activity must raise to the level of being a trade or business. An activity is generally considered to be a trade or business if it is regular, continuous, and considerable.
Determining whether a rental real estate enterprise meets these criteria can be difficult. The IRS has therefore provided a safe harbor whereby an enterprise will be treated as a trade or business for the purposes of the 20% pass through deduction if certain conditions are met.
Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year:
(1) Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
(2) 250 or more hours of rental services are performed per year with respect to the rental enterprise. Note that these hours of service do not have to be performed by you personally.
(3) 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. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement does not apply to the 2018 tax year.
For purposes of the safe harbor, rental services include:
- Advertising to rent or lease the real estate
- Negotiating and executing leases
- Verifying 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
- Supervision of employees and independent contractors.
Some types of rental real estate are not eligible for the safe harbor.
Accordingly, it is very important to maintain contemporaneous records to qualify for the 20% pass through deduction.
Please contact a Roth&Co adviser for further information or discussion about the new safe harbor rule.
