QBI deduction for Real Estate

Qualified Business Income Deduction for Real Estate Rentals

On Friday, January 20, 2019 the IRS issued final regulations as well as some additional guidance in regard to the QBI deduction for 2018. Much of the final regulations simply make the temporary regulations from August 8, 2018 permanent or expand discussion into entities such as Regulated Investment Companies and trusts. However, there is some additional guidance, as follows.

Definition of trade or business activity

The final regulations continue to use the previous but slightly modified definition in Reg. 1.199A-1(b)(14) as a Section 162 trade or business other than as an employee.  In the IRS’ own words “the Treasury Department and the IRS decline to adopt…” a definition other than regular, continuous activity for profit because it is too restrictive to adopt another definition.

Rental Activities

The taxpayer may continue to apply the trade or business tests which is the “regular, continuous, for profit” 3-part test of Code Section 162. However, in IRS Notice 2019-07 they also provided a safe harbor to qualify rental real estate activities for the QBI deduction that meet these three tests (applied separately to each property, or similarly at the taxpayer’s choice for all properties of the same type: residential or commercial):

 

1.     Maintain separate books and records for each rental activity;

2.     Perform at least 250 hours of rental services for each year for each rental activity; and

3.     Maintain contemporaneous records, logs or similar documents showing time, description, dates and who performed the services.

 

Finally, the taxpayer must include a signed statement with the return that they meet the requirements of this procedure.

“Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”

Some rental activities are excluded from being able use the safe harbor including triple net lease activities and real estate used by the taxpayer as a residence (such as an Air BNB).  Rental services that qualify include advertising; negotiating leases; verifying tenant applications; daily operation and maintenance; management; and supervision of employees and contractors.  The safe harbor rules may be used by individuals and pass-through entities such as LLC’s. The tests apply until 2023.

 
Instructions: Meet either 1 of the 2 tests and taxpayer qualifies for QBID @ 10/31/18 rules

 

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