this is more than you asked for but you'll see the 250 hours would include all properties and you don't even have to do all the 250 hours yourself. if you pay a landscaper to maintain the property their hours count towards the 250 hour requirement.
If a taxpayer’s rental real estate activity meets the safe harbor, then it will be treated as a trade or business for purposes of 199A.
The safe harbor sets out requirements that must be met, and includes several exclusions and caveats
The Safe Harbor – Specific Requirements
- Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise (“RREE”).
- At least 250 hours of rental services must be performed each year with respect to each RREE.
- The taxpayer must maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records must be made available for inspection at the request of the IRS.
Books-and-Records Requirement.
The safe harbor also contains rules that permit a taxpayer to aggregate separate properties and treat them as a single RREE .
250-Hour Requirement.
Each RREE must satisfy the 250-hour requirement. Specifically, rental services include:
- advertising to rent or lease the real estate;
- negotiating and executing leases;
- verifying information contained in prospective tenant applications;
- collection of rent;
- daily operation, maintenance, and repair of the property, including the purchase of materials and supplies;
- management of the real estate; and
- supervision of employees and independent contractors.
Moreover, rental services can be performed by owners, employees, agents, and/or independent contractors of the owners. Accordingly, it will become very important that vendors who perform services that could be counted towards the 250-hour requirement provide documentation.
The above list does not purport to be exhaustive. Specifically excluded are the following activities: financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; improving property under §1.263(a)-3(d); and hours spent traveling to and from the real estate.
The 250-hour requirement is an annual requirement, but the safe harbor relaxes this once an RREE has been in existence for at least four years. At that point, the 250-hour requirement need only be satisfied in any three of the five consecutive years ending with the taxable year.
Contemporaneous Documentation Requirement
The safe harbor contains specific language that a taxpayer may provide a description of the rental services performed by such employee or independent contractor, the amount of time such employee or independent contractor generally spends performing such services for the enterprise, and time, wage, or payment records for such employee or independent contractor.
Tax Return Statement
The safe harbor cannot be utilized unless the taxpayer attaches a statement to its tax return.
If a taxpayer has more than one RREE, the statement must list the required information separately for each RREE. The statement must include the following information:
- a description (including the address and category (commercial, residential, mixed-use)) of all rental real estate properties that are included in each RREE;
- a description (including the address and rental category) of rental real estate properties acquired and disposed of during the taxable year; and
- a representation that the requirements of the safe harbor have been satisfied.
Aggregating Separate Properties
As noted, the safe harbor contains a grouping rule that can both help and hurt taxpayers. This would help taxpayers in cases where the 250-hour requirement cannot be satisfied for an individual property but can be satisfied on an aggregate basis.
Generally, a taxpayer may only aggregate “similar” properties. For these purposes, commercial and residential properties are not treated as similar
Once a taxpayer treats interests in commercial properties or residential properties as a single RREE under the safe harbor, the taxpayer must continue to treat interests in all similar properties, including newly acquired properties, as a single RREE to the extent that the taxpayer continues to rely on the safe harbor.
However, a taxpayer that chooses to treat its interest in each residential or commercial property as a separate RREE may choose to treat its interests in all similar commercial or all similar residential properties as a single RREE in a future year.
Mixed-use properties are treated differently. An interest in mixed-use property may be treated as a single RREE or may be bifurcated into separate residential and commercial interests. However, such a project cannot be aggregated with other mixed-use properties.
For purposes of the safe harbor, mixed-use property is defined as a single building that combines residential and commercial units.
The Safe Harbor – Exclusions
The safe harbor sets out a number of exclusions,
- 1. The Safe Harbor Only Applies to Rental Real Estate.
- The Safe Harbor Does Not Apply to Triple Net Leases.
- The Safe Harbor Does Not Apply to Owner Residences.
- Real Estate Leased to an Affiliated Trade or Business.
