Real Estate & QBI Deduction

On Friday, January 20, 2019 the IRS issued final regulations as well as some additional guidance in regard to the QBI deduction for 2018. Much of the final regulations simply make the temporary regulations from August 8, 2018 permanent. However, there is some additional guidance for persons involved in real estate (information on real estate & QBI deduction) below.  We've also provided some checklists below that can help you determine if you qualify for the Qualified Business Income Deduction (QBID).

Rental Activities
Taxpayers can continue to apply the trade or business tests, which is the “regular, continuous, for profit” 3-part test of Code Section 162. However, in IRS Notice 2019-07 they also provided a safe harbor to qualify rental real estate activities for the QBI deduction that meet these three tests (applied separately to each property, or similarly at the taxpayer’s choice for all properties of the same type: residential or commercial):

1.      Maintain separate books and records for each rental activity;

2.      Perform at least 250 hours (or agent/employee or subcontractor)  of rental services for each year for each rental activity; and

3.      Maintain contemporaneous records, logs or similar documents showing time, description, dates and who performed the services.

We have 2 checklists below: first for real estate professionals; and second for clients claiming the safe harbor exemption for regular rentals. The safe harbor rules may be used by individuals and pass-through entities such as LLC’s. The tests apply until 2023.

Rental services that qualify include advertising; negotiating leases; verifying tenant applications; daily operation and maintenance; management; and supervision of employees and contractors.

Some rental activities are excluded from being able use the safe harbor including triple net lease activities and real estate used by the taxpayer as a residence (such as an Air BNB).

Finally, the taxpayer must include a signed statement with the return that they meet the requirements of this procedure.

Due Diligence Checklist for QBI Deduction-Real Estate Rental

Instructions: Meet either 1 of the 2 tests and taxpayer qualifies for QBID @ 10/31/18 rules

Real Estate Professional Test 1 YES NO
Does taxpayer spend at least 50% of total annual work hours in a real estate trade or business?
Does taxpayer have detailed time records to prove 50% test?
Are the records substantiated (written) and currently maintained?
Does the taxpayer spend at least 750 annual hours in the trade or business (not counting time as a W-2 employee unless >5% owner)
Does the taxpayer spend at least 500 annual hours on this specific property (may include spouse’s time)?
Does taxpayer have detailed time records to prove the 500 hour test?
Are the records substantiated (written) and currently maintained?
Summary: if all above answers are “Yes” the  taxpayer is a real estate professional and would generally be considered to meet the “regular, continuous, for-profit” rules to qualify for the QBI deduction
Conventional Rental IRS Notice 2019-07 Safe Harbor Test 2
On a regular basis does the taxpayer consult with advisors, negotiate and execute leases, consult with or act as property managers or personally maintain, manage or supervise the rental activity of the above property?
Does this activity continue throughout the year?
Does the taxpayer, employees, agents or independent contractor of the taxpayer spend at least 250 hours annually dealing with the advisors, managers or personally with tenants, repair or maintenance companies or on-site issues?
Does the taxpayer maintain contemporaneous written calendar time records to prove the above regular, continuous activity?

At Emerald Financial Partners, we are devoted to sifting through all of the rules and regulations to ensure you maximize your tax deductions.

 

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