The QBI deduction is phased out at certain income levels, depending on the definition of whether you participate in a “specified service trade or business” (SSTB). It is not clear whether rental real estate activity falls into the category of a SSTB based on unclear TCJA guidelines. The light at the end of the tunnel comes in the form of Notice 2019-17 which states: Rental activity is treated as a trade or business if the taxpayer spends 250 hours or more on rental services. This rule also holds for multiple rental activities combined into a single enterprise.
Before January 1, 2023, at least 250 hours of rental services must be performed each year in the enterprise. After December 31, 2022, the 250-hour test can be met in any three of the five consecutive tax years that end with the current tax year. But if the enterprise has been held for less than five years, the 250-hour test must be met for each post-2022 tax year.
To rely on the safe-harbor rule, the individual or pass-through entity must own the interest directly or through single-member LLCs that aren’t treated for tax purposes as separate entities apart from their owners. Taxpayers must either treat:
• All similar properties held for the production of rents as a single rental real estate enterprise.
Commercial and residential real estate can’t be treated as part of the same enterprise. Taxpayers also aren’t allowed to vary their treatment of properties from year to year, unless there’s a significant change in facts and circumstances.
To qualify for the 250-hour safe-harbor, the taxpayer must also meet the following requirements:
• Maintain contemporaneous records, including time reports and similar documents, concerning dates and hours of services performed, a description of all services performed and the identities of the parties performing those services.
• Negotiating and executing leases,
• Verifying information contained in prospective tenant applications,
• Collecting rents,
• Managing daily operations,
• Performing routine maintenance and repair of property,
• Purchasing materials, and
• Supervising employees and independent contractors.
• Procuring property;
• Studying and reviewing financial statements or reports on operations;
• Planning, managing, or constructing long-term capital improvements; or
• Traveling to and from the real estate.
• Any property rented on a triple net lease basis, where the tenant or lessee is required to pay taxes, fees and insurance and is responsible for maintenance activities for a property in addition to rent and utilities.
CONTACT US: Significant complexity remains for those who own multiple rental real estate properties, and must make decisions about maintaining them as separate enterprises, in light of being able to meet the 250-hours-per-enterprise requirement. Complying with the record keeping requirements in Notice 2019-7 may be a challenge, but our Fuoco Group tax professionals can help you set up procedures to meet that challenge. Immediately, start to track maintenance time that is charged to your properties and require your vendors to put hours on their invoices (not including drive time). Ask your real estate management company if they will provide you with a “Notice 2019-07 Compliance Report.” Contact us toll free at 855-534-2727 for further guidance.
