Qualified Business Deduction for Real Estate

Posted on February 4th, 2019

Business owners will be able to deduct 20 percent of their qualified business income on their 2018 federal income tax return. The 20% pass through deduction applies to businesses that qualify as a Section 162 trade or business. The IRS has issued further guidance for those wondering if income from rentals will qualify as Section 162.

Revenue Procedure 2019-7 offers a Safe Harbor provision for Rental Real Estate if all of the following requirements are met:

  • Separate books and records are maintained for each rental activity (or the combined enterprise if grouped together),
  • 250 hours or more of “rental services” are performed in the year by owners, employees or contractors.
  • The taxpayer maintains contemporaneous records, including time reports or similar documents, regarding 1) hours of all services performed, 2) description of all services performed, 3) dates on which such services are performed, and 4) who performed the services.
    • Note: the contemporaneous records will not apply to tax years prior to 2019.

Rentals that do not qualify for the pass through deduction include:

  • A rental property that was used as a residence a personal residence for more than 14 days during the year.
  • Triple Net Leases: any lease where the landlord passes on the responsibility for paying real estate taxes, insurance, and maintenance to the tenant.

For a comprehensive analysis, we encourage clients to reach out to us or contact their CPA.