Finally, the IRS has introduced rules related to the Qualified Business Income (QBI) deduction under IRC Section 199A for taxpayers with rental real estate. Section 199A was introduced as part of the Tax Cut and Jobs Act (TCJA) in 2017.
As a refresher, the QBI deduction provides an offset to taxable income based on earnings from business operations for non-corporate taxpayers. While many industries and business types were specifically addressed by law or regulation, no mention was specifically made of what rental real estate income would qualify as part of the QBI deduction calculation. Or whether it would qualify at all. While there were several court cases, clear guidance was still lacking.
On September 24, 2019 the IRS provided clarity in this area by issuing Rev. Proc. 2019-38. For a taxpayer following the finalized safe harbor rules, interests in rental real estate will be treated as a trade or business for purposes of the QBI deduction under IRC Section 199A. These rules were first proposed by the IRS on January 18, 2019 in Notice 2019-07.
A few items regarding the safe harbor rules:
- They are effective for tax years ending after 12/31/2017.
- The contemporaneous records requirement is applicable for tax years beginning January 1, 2020 or later.
- They only applies for purposes of the QBI deduction and IRC Section 199A.
- Requirements regarding real estate in other areas of the code or regulations are not affected.
What Does This Mean for Me?
- Little impact for companies primarily in the rental real estate business since they would most likely be meeting the requirements in Rev. Proc. 2019-38 already.
- More impact for non-corporate taxpayers that are renting out an unused facility or that own a few rental properties as a side business.
- The rules for 199A/QBI purposes do not supersede other rental real estate rules (e.g. Form 8582 Passive Activity Loss rules).
- The revenue procedure provides specific rules for rental services and total hours required to meet the safe harbor standard.
Most importantly, there are no changes in how you would depreciate your rental property in Sage Fixed Assets – Depreciation. As always, contact a tax professional to discuss your particular situation.