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Tax Law: Do You Own Rentals?

Alright, I know, it’s yet ANOTHER new tax law update blog post.  2018 tax filing season began January 28th, 2019 though, and we want you to have this information while it can still do you some good!

The biggest issue with the new tax law that came into effect last fall (or any new tax law for that matter) is that it has never been adjudicated. That’s a fancy way to say they haven’t worked out the kinks in court yet nor set precedent for case law moving forward.

However, the IRS just posted publications clarifying the application of the new (and probably most exciting addition) Qualified Business Income (QBI) deduction.  As previously mentioned in blog posts, pretty much any business that is NOT a C corporation can benefit from this deduction, which essentially removes 20% of qualified income from taxable income.

These newly published clarifications now specifically spell out a safe harbor that will allow rental real estate income to be considered qualified business income for the sole purpose of calculating the QBI deduction.

Requirements to qualify under safe harbor:

  • Own a rental house for the sole purpose of producing income in the form of rent
  • Keep separate books and records to track income and expenses
  • Perform 250+ hours of “rental services” (read advertising, leasing, collecting rent, managing property etc.)
  • Keep record of time spend providing said services
    • Total hours of service
    • Description of service
    • Date of service
    • Who performed service

Leases that require the tenant to pay costs the owner normally pays, such as taxes, interest, and insurance, are excluded from this safe harbor, as are any properties the owner used as a residence for any part of the year.

If you own several properties, you can consider all residential properties as one “enterprise” for the purpose of tracking hours and services (same for commercial properties).

The only reporting requirement is to attach a statement to the tax return attesting to the fact that all requirements have been satisfied.  The statement must be signed by the taxpayer or authorized representative.

TALK TO YOUR TAX GUY OR GAL!!! After deductions and depreciation there may not be just a ton of income left over that would fall under the 20% calculation.  Even so – every little bit counts when maximizing your tax return.

View the original revenue procedure draft here.