New IRS docs on Section 199A for Rental Owners

[cathy63]

I know several of us here who own a single rental property are interested in whether we'll be able to use the new Section 199A 20% passthrough deduction on our taxes. The IRS issued new guidance yesterday and a couple of interesting articles popped up in my news feed today. This Forbes article gives a good summary:

https://www.forbes.com/sites/anthonynitti/2019/01/19/irs-publishes-final-guidance-on-the-20-pass-through-deduction-putting-it-all-together/#45583e76d9f0

In Revenue Procedure 2019-7, the IRS offered a safe harbor providing that a rental activity (or multiple rentals if the taxpayer chooses to treat them as a combined enterprise, with the understanding that commercial properties cannot be grouped with residential properties) will rise to the level of a Section 162 trade or business if:

- separate books and records are maintained for each rental activity (or the combined enterprise if grouped together),
- 250 hours or more of "rental services" are performed per year for the activity (or combined enterprise), and
- the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding 1) hours of all services performed, 2) description of all services performed, 3) dates on which such services are performed, and 4) who performed the services.

For these purposes, rental services include advertising to rent, negotiating and executing leases, verifying tenant applications, collection of rent, daily operation and maintenance, management of the real estate, purchase of materials, and supervision of employees and independent contractors.

Original IRS doc is here: https://www.irs.gov/pub/irs-drop/n-19-07.pdf

 

[Backpacker]

Clear as mud LOL. We've got 4 rentals, and I suspect if I put pencil to paper I might find 250 hours of my time spent on them. I do most of the maintenance myself, plus time spent on finding tenants, bookkeeping, monthly drive bys) inspections. Sounds like I do need to document the time spent. I'm very interested to see how it goes when I start working on taxes.

 

[Octogirl]

+1. Thank you. We had 250 + hours at our rental this year.

 

[pb4uski]

Sounds like they are making it up as they go along. I think that I'll probably claim the 20% and then see how the administration of it sorts out.

 

[newellcr]

Interesting. It sounds like the IRS is admitting that rentals may not be passive investments.

 

[gauss]

Very good information - Thanks.

Just read the first couple of paragraphs of the actual IRS notice.

I noticed that these are the conditions for a Safe Harbor for Rental real estate wrt QBI.

Just because you don't meet these new conditions, doesn't imply that you can't legally take the deduction if you otherwise qualify.

If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in § 1.199A-1(b)(14).

 

[Earl E Retyre]

I have rental real estate, but do not spend 250 hours per year supporting it. I have a long term tenant, minimal maintenance, etc. So, I assume this will not apply to my situation.

 

[cathy63]

I have rental real estate, but do not spend 250 hours per year supporting it. I have a long term tenant, minimal maintenance, etc. So, I assume this will not apply to my situation.

Yes, that's our situation as well. 250 hrs is more than 6 weeks of full-time work. If we had to spend that much time dealing with a rental, we wouldn't have one.

 

[Peter]

Yes, that's our situation as well. 250 hrs is more than 6 weeks of full-time work. If we had to spend that much time dealing with a rental, we wouldn't have one.

+1.

Or hire a property manager.

 

[gauss]

Remember folks, the 250 hours is requirement only for the new Safe Harbor, but by no means required to take the deduction.

You can qualify for the QBI deduction under Section 162 as has been the case for years.

The Nolo book "Every Landlord's Tax Deduction Guide" is very good for highlighting the issues of when a rental property rises to a Trade or Business and when it is merely an Investment.

I had $7,000 in expenses that depended on the proper interpretation of this (Business vs Investment) so I was motivated to do the research. I suspect that most landlords, over say a 7 period, will have an equal amount of money on the table depending if they properly take the QBI deduction or not.

You may wish to consider working with a tax professional who specializes in this area. It may save you some money.

-gauss

 

[Backpacker]

Clear as mud LOL. We've got 4 rentals, and I suspect if I put pencil to paper I might find 250 hours of my time spent on them. I do most of the maintenance myself, plus time spent on finding tenants, bookkeeping, monthly drive bys) inspections. Sounds like I do need to document the time spent. I'm very interested to see how it goes when I start working on taxes.

May have jinxed myself with the "I do most of the maintenance myself"... Got a call from one of the renters last night with no water. It was -12 F. So spent this morning working in an outdoor well pit. Brrrrrrr - good news is got it thawed out and back up and running by noon.

 

[wolf]

Typical bureaucracy. Here I thought we landlords "all" qualified? 250 Hrs. And supporting
documentation. What a joke. As mentioned in previous post. If I had to spend 250 Hrs,
on my rentals per year, would have never even considered being a landlord.
No landlord would fall into this category. Seems, they are trying to change the IRS law,cause too many of us would get the benefit. (and reduce income for the Feds.).

Hope, in the fine print, we still qualify.

 

[target2019]

250 hours does seem a bit high for 1 property. Maybe IRS is thinking multiple properties?

Anyways, that is just under 5 hours per week. You may drive to the property twice a week to observe things. There's business time in your home office, reading about Real Estate! Out to fix drippy faucet, leaking pipe, who knows what. Any RE conventions in Las Vegas?

Keep a journal with mileage, labor, etc. You're good to go.

 

[gauss]

250 hours does seem a bit high for 1 property. Maybe IRS is thinking multiple properties?

Anyways, that is just under 5 hours per week. You may drive to the property twice a week to observe things. There's business time in your home office, reading about Real Estate! Out to fix drippy faucet, leaking pipe, who knows what. Any RE conventions in Las Vegas?

Keep a journal with mileage, labor, etc. You're good to go.

1) For the purpose of the Safe Harbor, the IRS specifies what is allowable and not allowable for countable Rental Services towards the 250 hours.

2) Note that the owner does not need to actually perform the Rental Services him/herself, but can also contract it out.

.04 Rental services. Rental services for purpose of this revenue procedure include:
(i) advertising to rent or lease the real estate;
(ii) negotiating and executing leases;
(iii) verifying information contained in prospective tenant applications;
(iv) collection of rent;
(v) daily operation, maintenance, and repair of the property;
(vi) management of the real estate;
(vii) purchase of materials; and
(viii) supervision of employees and independent contractors.

Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners.

The term rental services does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

As such, travel time would not count for the Safe Harbor, but would count under the Section 162 requirements.

Learning about the new tax law (if you do your own taxes) could also be significant if your are qualifying under Section 162.

-gauss

 

[calmloki]

Instead of doing rentals all the time we are only doing them most of the time, so we will happily take the 20% tax free income and see if those tax savings offset our lost personal itemized deductions. My guess is it will be close.