The IRS issued a notice on January 18, 2019 about specific conditions under which your rental real estate enterprise may be treated as a trade or business.
This safe harbor is available to taxpayers who want to claim the section 199A deduction with respect to a rental real estate enterprise. If you can meet the safe harbor requirements, your real estate enterprise will be treated as a trade or business.
To qualify for this safe harbor your enterprise must satisfy several requirements, as follows.
Qualifiers for the IRC Section 199A Deduction
1. You must maintain separate books and records showing income and expenses for each rental real estate enterprise.
2. You (or your staff or contractors) must perform at least 250 hours of rental services during the tax year for each rental real estate enterprise. You may not combine commercial and residential rentals within the same real estate enterprise. Rental services that qualify include:
- Advertising to rent or lease the real estate
- Verifying information on the tenant applications
- Negotiating and executing leases
- Maintenance and repair of the property
- Collecting rent
- Daily operation, maintenance and repair of the property, including:
- Purchase of materials for repairs
- Supervision of employees and independent contractors
As the property owner, you may perform these services yourself or have your employees, agents or independent contractors do so.
3. You must maintain contemporaneous records to document these hours of services, including time reports, logs or a similar description of the services performed, the dates on which they took place and who performed them. This means you must track everything, including your personal time and the time of those you employ. Maintaining a log book and invoice file scrupulously will satisfy these requirements. Your records should be available for inspection at the request of the IRS. The records requirement does not apply to taxable years beginning prior to January 1, 2019.
If you cannot satisfy these requirements, your rental real estate enterprise may still be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in § 1.199A-1(b)(14).