IRS Institutes Safe Harbor for Taxpayers Whose Rental Properties Could Qualify for the Business Income Deduction
Among the many changes made by the Tax Cuts and Jobs Act (TCJA) was an amendment to the tax code regarding the qualified business income deduction. Under a recently published regulation, the IRS added to these changes by instituting a safe harbor during which taxpayers who own interests in rental property can treat these properties as a trade or a business for qualified business income deduction purposes. To learn more about the safe harbor requirements for this deduction, please contact dedicated tax return preparation lawyer Ronald Cutler who can advise you.
What is the Safe Harbor?
The IRS’ recently instituted safe harbor applies to taxpayers who own rental properties, including those used for multiple purposes. As long as all of the safe harbor requirements are met, this exception allows taxpayers to treat their rental real estate properties as a single business or trade when it comes to claiming the business income deduction. Taxpayers who fail to fulfill these requirements may still be able to claim their interest in property as a business or trade, but only if the property meets the definition of a business.
Who Qualifies for the Safe Harbor?
The business income tax deduction safe harbor is only available to taxpayers who are attempting to claim the section 199A deduction for rental real estate enterprises, which are defined as any interest in real property that is held to generate lease or rental income. Ownership interests in single properties, as well as interests in multiple properties qualify under this definition, but only if the taxpayer (or passthrough entity) holds its ownership interest:
- Directly; or
- Through an entity that is regarded as being separate from its owner, such as a limited liability company with only one member.
In addition to these requirements, taxpayers attempting to qualify for the safe harbor must ensure that they have access to:
- Separate records and books that reflect the income and expenses for each rental enterprise;
- Contemporaneous records, including logs and time reports regarding hours of services performed, the description of those services, as well as the date on which those services were performed, and who performed them; and
- A statement to attach to the tax return filed for the years on which the safe harbor is being claimed.
It’s also important to keep in mind that the number of hours of rental services that an owner must have performed on a property vary depending on how long he or she has owned the property. For instance, rental real estate enterprises that have existed for less than four years must have records of at least 250 hours of service. Those who have owned rental property enterprises for more than four years, on the other hand, must have paperwork documenting 250 or more hours of rental services over the last three out of five years.
Call or Contact Our Legal Team
For help determining whether you qualify for the business income deduction safe harbor, please contact dedicated Florida tax return preparation attorney Ronald Cutler, P.A. at 386-490-9949 today.