The IRS has released guidance outlining a safe harbor that allows certain rental real estate enterprises to be treated as a trade or business for purposes of the 20% qualified business income (QBI) deduction enacted under section 199A of the Internal Revenue Code.
The safe harbor is available for taxpayers who attempt to claim the deduction with respect to a “rental real estate enterprise.” For purposes of the safe harbor, a rental real estate enterprise is an interest in real property held to generate rental or lease income. It can be an interest in one property or multiple properties. The taxpayer or pass-through entity relying on the safe harbor must hold each interest directly or through a disregarded entity such as a single-member limited liability company.
To qualify for the safe harbor, a taxpayer must meet each of these four requirements:
- Maintain separate books and records to reflect income and expenses for each rental real estate enterprise.
- For rental real estate enterprises that have existed for less than four years, perform 250 or more hours of rental services per year. For other rental real estate enterprises, perform 250 or more hours of rental services in at least three of the past five years.
- Maintain contemporaneous records, including time reports, logs, or similar documents, showing hours for all services performed, descriptions of all services performed, dates on which services were performed, and identities of individuals who performed the services.
- Attach a statement to the return filed for any tax year in which the safe harbor is relied upon. The statement must include descriptions (including the address and rental category) of all rental real estate properties included in each rental real estate enterprise, a description of rental real estate properties acquired and disposed of during the taxable year, and a representation that the safe harbor requirements have been satisfied.
An interest in real estate that fails to qualify for the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it otherwise meets the definition of a trade or business found in IRS regulations.
To learn more about how your rental real estate activities might qualify for this safe harbor, please contact your CRI tax advisor.