Good news for rental real estate owners! The IRS has recently issued the Revenue Procedure Code 2019-38. The code would allow taxpayers who have a stake in rental real estate or mixed-use property to present it as a trade or business. Besides, reflect it as a qualified income business deduction under section 199A of the Internal Revenue Code.
The safe harbor would allow you to take the benefits of the section 199A and make the most of your tax liabilities. Read our article on “All you need to know about the section 199A of the Tax Reforms Code” to understand how you may benefit from this latest tax update.
In this article, we will be throwing light on the many facets of the Revenue Procedure Code 2019-38 and the prerequisites for eligibility.
Requirements to qualify for the safe harbor
- You would need to maintain separate books and records tracking the income and expenses for all such real estate and mixed-use properties.
- The rental real estate which you own or have an interest in shall perform at least 250 or more hours of rental service if held for more than four years. In case such property is held for more than five years, then it shall perform at least 250 or more hours of rental service in the past three years.
- You would need to maintain a record of all the time reports, logs, and similar documents reflecting:-
- Hours of services performed
- Description of services performed
- Dates of performance of such services
- Details of individuals who performed such services
- You would need to attach a statement to your tax returns filed for the tax year(s) for which you want to claim the safe harbor.
What if all the safe harbor requirements are not met?
If you meet all the requirements of the safe harbor, your interest in such rental properties will be treated as a single trade or business for the purpose of 199A deduction. However, if you do not meet all the requirements of the safe harbor, then also you might qualify to reflect your stake in a rental real estate as a trade or business. In this case, your stake should meet the definition of a trade or business laid down by the section 199A regulations.
If you are a U.S. taxpayer, you would be required to seek the claim on the section 199A deduction to avail this safe harbor. Please note that this safe harbor is only applicable to rental real estate enterprises and solely for the purpose, such properties are defined as an interest in rental real estate for generating rental income or lease.
There are many other facets of this tax code, like the interest in such properties shall be held directly by the taxpayer or through an entity like a limited liability with a single member. If you are one such taxpayer who holds such a stake in rental real estate and wishes to explore more to take benefit, then you can contact your MyTaxFiler expert and be on your way to make the most of this tax reform.