S E C TION 1 9 9A
GUIDANCE FOR
REAL ESTATE
INVESTORS
ON THE 20%
DEDUCTION
PROVIDED BY
Bill Angove
California State Manager & Vice President
National Headquarters
1420 Rocky Ridge Drive, Suite 100
Roseville, CA 95661
Office 800.282.1031 ext. 3519
Local 916.791.5991
Cell 916.832.1031
[email protected]
- 36 -
2018 - ISSUE VIII
The tax code provides incentives to encourage taxpayers
to invest in real estate. Section 1031 exchanges, which
have been a valuable tax deferral strategy since 1921,
help real estate investors redeploy capital on a tax-de-
ferred basis at the time of disposition into more desirable
“like-kind” replacement properties or a property that
provides a better return on investment. A new section of
the tax code, Section 199A, offers the potential for certain
real estate investors to also receive favorable tax benefits
in the form of an added deduction while owning and man-
aging investment properties. The potential to receive tax
benefits while owning investment property, coupled with
the option for tax deferral in a 1031 exchange at the time
of sale, provide investors who own real estate with signifi-
cant and meaningful tax advantages.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) created a
new section of the tax code, §199A. Section 199A
provides a 20% deduction for owners of certain
pass-through entities such as limited liability companies,
partnerships and other entities. The intent of this new
20% deduction is to provide some additional tax rate
relief and parity to pass-through entities since C-Corpo-
rations permanently benefitted from the reduction in the
corporate tax rate from 35% down to 21%.
On January 18, 2019, the Treasury released additional
guidance regarding the 20% deduction for qualified busi-
ness income (“QBI”) and the 20% deduction provided by
§199A of the code. The IRS provided a proposed revenue
procedure and proposed safe harbor describing when a
“rental real estate enterprise” will be treated as trade or
business for purposes of §199A. In Notice 2019-07, the
IRS introduced a new tax term, a “rental real estate enter-
prise” along with conditions that must be met for a rental
real estate enterprise to be considered a trade or busi-
ness and eligible for the §199A deduction. For purposes
of this safe harbor, a rental real estate enterprise is
defined as an interest in real property held for the produc-
tion of rents and may consist of an interest in multiple
properties. The following are requirements that investors
must meet to qualify for the safe harbor: