The Tax Cuts and Jobs Act (also known as the Trump tax reform) implemented Internal Revenue Code Section 199A, which offers a deduction of up to 20% of the income for most businesses. Historically, whether rental real estate has met the tax code definition of a “trade or business” has not been a question of much substance, since rents are not subject to the self-employment tax. However, since the 20% haircut is only available for businesses, it’s important that rental real estate owners make sure that they will qualify as such. During January, the IRS has released regulations outlining a safe harbor that rental operators can use to document their qualification as a business. The safe harbor has three requirements: (1) The owner must maintain separate books and records for the real estate enterprise. (2) 250 hours of rental services must take place within the enterprise each year. (3) Starting for 2019, the owner must keep contemporaneous records detailing the dates and hours services were performed, description of services performed, and names of who performed the services. Failure to meet the safe harbor does not automatically disqualify rental owners from taking advantage of Sec. 199A. The determination of whether a rental activity is a business is made by the facts and circumstances of each unique situation. Factors at play include the type and number of properties rented, the owner’s day-to-day involvement, any ancillary services provided under the lease, and the terms of the lease. If you don’t believe you will reach the safe harbor for 2019, but you might be close, there are things you can do.
Accurate, easy-to-follow records are the best defense against any IRS issues. It will be critical for landlords with fewer properties to capture all their eligible time spent on their rental activities, and to not be shy about getting names and hours worked from contractors hired to maintain their properties.