Qualifying Rental Real Estate for the 20% Qualified Business Deduction

If you are a rental real estate company, you may be eligible for a Qualified Business Income 20% deduction under IRC Section 199A. The first step is for the company to qualify as a “trade or business” for purposes of Section 199A.  The IRS has recently provided a safe harbor for this determination.  To qualify for the safe harbor, the rental real estate property (or a combination of properties) must have 250 or more hours of “rental services” performed with respect to its activities.

“Rental services” includes advertising, negotiating leases, verifying tenant applications, collecting rent, daily operations, maintenance and repairs, management of real estate, purchase of materials, and supervision of employees and independent contractors.  The hours of service may be performed by owners, employees, agents or independent contractors.  Rental services do not include financial or investment management activities, such as acquisition, arranging financing, planning or travel time.  Vacation rentals and triple net lease rentals are also excluded from the safe harbor.

RECOMMENDED ACTION:  You can still qualify as a trade or business on your specific facts even if you fail to meet the safe harbor.  Whether or not you qualify for the safe harbor, if you want to be treated as a trade or business, then all actions should be consistent with that status.  This includes filing Forms 1099 for payment to unincorporated service providers that exceed $600.  Failure to file the Forms 1099 could be viewed as an admission that the rental activity is not a trade or business.

Form 1099-MISC is generally issued when you pay an unincorporated independent contractor (and corporate attorneys) $600 or more during a year for work performed in your trade or business.  Form 1099- MISC should be filed by January 31, 2019.