Section 199A Deduction for Rental Real Estate Owners

Internal Revenue Code (“IRC”) section 199A provides a deduction to non-corporate taxpayers of up to 20 percent of the income from “qualified business”, including those operated through a partnership, S corporation, or sole proprietorship, subject to limitations.  According to the proposed regulations, rental real estate owners may potentially be qualified for the 199A deduction if the rental activity rise to the level of a “trade or business” as defined under the section 162(a), which lacks clear definition and leaves room for debate and uncertainty. To help mitigate this uncertainty, the IRS issued Notice 2019-07 (the “Notice”) providing a “safe harbor” under which a rental real estate enterprise would be treated as a trade or business for purpose of the section 199A and thereby qualify for the 20 percent deduction.

According to the safe harbor rule, for purpose of 199A deduction, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied:

• Separate books and records are maintained to reflect income and expense of each rental real estate enterprise;
• 250 or more hours of rental services (as defined below) are performed per each year with respect to the rental real estate enterprise; and
• The taxpayer maintains contemporaneous records of hours of all rental services performed; description of all services performed; dates on which such services were performed; and who performed the services.

The Notice provides that rental service includes (i) advertising to rent or lease; (ii) negotiating and executing leases; (iii) verifying 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 Notice explicitly excludes triple net lease and owner-occupied rental properties from the safe harbor.

Please refer to the Notice 2019-07 https://www.irs.gov/pub/irs-drop/n-19-07.pdf for additional detail.