This is the seventh in my series of tax updates to get my clients ready for their December Tax Planning Sessions. The One Big Beautiful Bill Act (OBBBA) changes discussed today include…
1 – Rental Real Estate Clarifications
One of the major clarifications in the Tax Cuts and Jobs Act that remained the same in OBBBA was in the area of Rental Real Estate. The problem is the fact that the Qualified Business Income Deduction was only applicable for an active trade or business.
Since Rental Real Estate is normally considered passive income rather than active, and since everyone understood that the TCJA Law always intended for rental real estate to be included in the 20% reduction rules, there were obvious clarifications that were necessary.
There are three ways for a Rental Real Estate Enterprise (RREE) to qualify under the IRS Code Section 199A provisions for QBID.
2 – Safe Harbor
Those Safe Harbor requirements include:
1 – Separate books recording income and deductions for the RREE
2 – At least 250 hours of rental services performed in the tax year with respect to
the RREE
3 -The taxpayer maintains contemporaneous records regarding all services performed for the RREE.
All hours worked on the property, whether by you or your contractors, can be included to meet the Safe Harbor Requirements. Further, if you have more than one RREE, hours may be combined from several properties to meet the requirement.
The Safe Harbor exception excludes personal residences. Triple Net Leases are also excluded.
3 – Self Rentals
The rental or leasing of property to a related party normally qualifies inside the rules governing Qualified Business Income. Self-Rentals that are Triple-Net Leases can also be included.
Self-Rentals do not qualify if the building is used for a Specified Service Trade or Business. The IRS recognized the potential for abuse in this area and specifically prohibited it.
Let’s use my business as an example. The Accounting Trade, being one of the professions, doesn’t receive the 20% reduction for Qualified Business Income. While I own my firm, I also own the building that houses my firm.
Why would I not magically double or triple my rent so that I could receive some QBID? Because of this, self-rentals for the purposes of a SSTB, also don’t get the 20% deduction.
4 – Cost Segregation Studies
Real Estate used for a business purpose is generally depreciated over 27.5 years if its Residential Property and 39 years for all other types. This means that if you purchase a piece of non-residential real estate for $1M and we set aside $100K of that purchase price for land, if the building is put into use on the first day of the year, that we’ll only get a depreciation deduction of $23,077 per year.
Back in the eighties there was a hospital tax case that challenged this law saying that individual components of a building such as electrical, HVAC, or even landscaping, had a very different useful life and should be depreciated as such. Interestingly enough, the Tax Courts agreed.
This allows us to speed up the depreciation process of any commercial building by segregating its components as 3, 5, 7, 9, and 15 year properties. In doing this, some of the components may also be included as bonus depreciation, further increasing the annual deduction.
In order to do this, a Cost Segregation Study must be completed by a specialist and you must be up to date on your tax filings. In higher interest rate years such as 2025, the added benefit of speeding up depreciation can make certain projects financially viable given the tax savings.
Let me leave you with this…
I wanted to write about real estate because its become such a challenging profession. Also because we do a lot of work in this area.
When you look at the increases we’ve seen in property taxes, utilities, insurance, maintenance costs, and interest rates, it easy to see why its so challenging. Rents haven’t begun to catch up and provide the margins which were common even a decade ago.
This has left most longer term landlords in a position where their cash flows are paper thin or non-existent.
Residential Landlords have problems maintaining their properties. Commercial Landlords are afraid to sign leases that require a buildout, fearing that the tenant will be gone in just a couple of years.
Many long-term landlords supplemented their losses with commissions from real estate sales. And now that those commissions are primarily only on the sell side, much of that income has dried up as well.
When considering all of these factors, it’s easy to understand why the tax work and tax planning for these types of entities and practitioners has become so important. In many instances, the tax savings that can be offered through good tax planning are the only reason to hold on to these buildings in the first place.
If you’re having issues in this regard, I’m waiting for your call.
Have a great weekend. Stay warm. We’ll talk again on Monday…
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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