BPM's Real Estate Insights 2019 Volume 01 | Page 10

IRC Section 199A: IRS Provides Trade
or Business Safe Harbor for Rental
Real Estate
By Jackie Matsumura and Bob McGrath
The IRS released final regulations under IRC Section 199A
on January 18, 2019. Along with the regulations, the IRS
issued Notice 2019-07, which contains a proposed revenue
procedure that provides a safe harbor for a rental real estate
enterprise to determine whether it would qualify as a trade or
business and, therefore, be eligible for potential tax benefits
under Section 199A.
IRC Section 199A is a significant new tax provision included
in the Tax Cuts and Jobs Act (TCJA) passed in December
2017. Section 199A is a complex provision allowing non-
corporate owners of certain businesses a deduction of
up to 20% of domestic qualified business income from a
qualified trade or business. One of the major uncertainties
under Section 199A was how the provisions applied to
rental activities; specifically, the determination of whether a
particular rental activity rose to the level of a qualified trade
or business. Consistent with the Section 199A proposed
regulations issued in August 2018, the final regulations
provide that this determination is made based on prior case
law. Tax practitioners and real estate industry professionals
appealed to the IRS to provide clearer guidance or a bright
line test for taxpayers to rely upon in complying with Section
199A. The proposed revenue procedure is a welcome
development on this front. The safe harbor explained below
will assist taxpayers and their advisors in determining if their
real estate activities qualify for the potential benefits under
Section 199A.
A rental real estate enterprise is treated as a qualified trade
or business for IRC Section 199A purposes if the following
requirements are met:
1. Separate books and records are maintained for each
rental real estate enterprise
2. At least 250 hours of rental services are performed per
year (for taxable years beginning after December 31,
2022, in any 3 of the 5 consecutive taxable years)
3. Taxpayer maintains contemporaneous records (time
reports, logs, etc.) specifying:
a. hours of all services performed,
b. description of services performed,
c. dates on which such services were performed, and
d. who performed the services.
The contemporaneous recordkeeping requirement is waived
for tax years beginning before January 1, 2019.
Rental services for purposes of the 250-hour requirement
include:
1. Advertising to rent or lease the real estate
2. Negotiating and executing leases
3. Verifying information in tenant applications
Rental real estate enterprise is defined under the proposed
revenue procedure as an interest in real property held for the
production of rents and may consist of an interest in multiple
properties. 4. Collection of rents
The individual or relevant pass-through entities (“RPE”—
a partnership, S corporation, estate or trust that is owned
directly or indirectly by at least one individual, estate or trust)
must hold the interest directly or through an entity disregarded
as an entity separate from its owner. Taxpayers must either
treat each property held for the production of rents as a
separate enterprise or treat all similar properties held for the
production of rents as a single enterprise. Commercial and
residential real estate may not be part of the same enterprise.
The taxpayer must be consistent with the treatment from
year-to-year unless there has been a significant change in
facts and circumstances. 7. Purchase of materials
10 BPM Real Estate Insights
5. Daily operation, maintenance, and repair of the property
6. Management of property
8. Supervision of employees and independent contractors
The rental services listed above may be performed by owners
or by employees, agents and/or independent contractors of
the owners.
Rental services do not include financial or investment
management activities including arranging financing,
procuring property, studying and reviewing financial
statements reports on operations, planning, managing or
constructing long-term capital improvements, or hours spent
traveling to and from the property. Real estate considered
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