One of the major clarifications in the new law came in the area of Rental Real Estate. The problem came from 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.
Rental Real Estate Clarifications
There are three ways for a Rental Real Estate Enterprise or RREE to qualify under the IRS Code Section 199A provisions…
Safe Harbor
The 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.
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 in 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.
Facts and Circumstances
If the facts and circumstances involved in the RREE lend themselves to an active trade or business, then generally this property can be included for purposes of QBI.
Qualified Business Income
Income must be connected with a U.S. Trade or Business. Foreign Source Income doesn’t qualify. Guaranteed payments to partners of partnerships do not qualify. This can, from a planning standpoint, be a good reason for an S Election.
Let me leave you with this..
.
I’ve written extensively about Real Estate Issues in trying to get all of you ready for our December Tax Planning Sessions. This is the tenth column in that series.
The reason is that we do so much work in this arena.
Whether you are a major developer holding massive amounts real estate and rental income, are a buy-and-flip specialist, a realtor that holds rentals on the side, or are in a simpler self-rental situation, all of this is important. In the event of an examination, this would be some of the first issues they look at.
They’re always looking to eliminate deductions based on bigger issues. It’s simply easier and more time effective than getting into the gory details that would be smaller deductions.
If the basics aren’t in place, you’re inviting disaster. If you need help or have questions, please let us know.
We’re all going to get through this. Let’s get through it together.
Schedule a Free Consultation, please click here.
Watch our Introduction Video here.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, Accounting and Tax Work, Tax Planning, or Tax Representation, 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.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.
Call us today to schedule your free consultation
773-267-7500
Email me at: Chris@AccountingSolutionsLtd.com