Rental activities are passive activities. They are not considered a business unless you are a real estate professional.
However, certain provisions have been made over time that allows landlords special treatment. One is the special allowance that lets you deduct up to $25,000 against ordinary income. Another is the QBI deduction.
On September 24, 2019, the IRS issued Revenue Procedure 2019-38 (Rev Proc 2019-38). This revenue procedure provides a safe harbor under which income from rental real estate will be QBI.
199A Applied to Real Estate Investments
Under Section 199A rental of real estate is treated as a trade or business provided the owner is an individual. Most of the time, real estate qualifies under Section 199A if the primary purpose for engaging in real estate rental is for income or profit.
Corporations and partnerships aren’t eligible for the Section 199A deduction on their tax returns. However, the shareholders of an S corporation or the partners of a partnership (or limited liability company taxed as a partnership) may be eligible for the deduction,
This article discusses the Rev Proc 2019-38 safe harbor. General discussion of Section 199A and specifics regarding its application to real estate investments are beyond the scope of this article.
Safe Harbor Requirements
The Rev Proc 2019-38 includes these requirements:
- The taxpayer must hold its interest in real estate either directly or through a disregarded entity.
- The taxpayer must be engaged in a rental real estate enterprise (RREE).
- In three of the previous five years, 250 or more hours of rental services per year must have been performed for the RREE. If the RREE hasn’t yet existed for five years, then there must have been 250 or more hours of rental services performed every year since it was formed.
- The RREE must maintain separate books and records. If the RREE owns multiple properties, it may maintain records at the property level and consolidate them at the RREE level.
- The taxpayer annually elects to rely upon the safe harbor, and the taxpayer or RREE attaches a statement to its tax return containing specific information.
