Today, I’m talking about…
Hello there. Are you a real estate professional? Have you heard about the Qualified Business Income Deduction? Are you wondering if that applies to you in your real estate? If you’re a real estate professional and you have questions about a Qualified Business Income deduction, you’ll want to stay tuned and listen to this presentation. For real estate taxpayers, the IRS issued a safe harbor on which a rental real estate enterprise can be treated as a trade or business. And remember when I talk about Section 199A, I’m talking about the new Qualified Business Income Deduction that has been in the media recently. What is Qualified Business Income Deduction? Well, Qualified Income Business Deduction was enacted by Congress to provide a deduction to non-corporate taxpayers of up to 20% of a qualified business income. So this is pretty significant. So that means if you make $100, you only have to pay tax on 80% of your business income. So, these non-corporate taxpayers include partnerships, S corporations, sole proprietors and qualified public traded partnership income. And now, real estate professionals have been designated qualified under the safe harbor.
So a safe harbor was provided for rentable real estate enterprises. A real estate enterprise is defined as an interest in real property held for the production of rent and it consists of interest in multiple properties. So in other words, this is not investment property. It’s not property you’ll buy in order to flip over. This is actually something you’ve invested in, and you’re keeping and you’re actually renting out. The interest must be held directly by you or you can own it through a disregarded entity like an S corporation or partnership, but you have to have direct interest in the property. You might either treat each property held for the production of rent as a separate entity, so you can take Section 199A on every single property, or you can treat similar properties held for the production of rent as one single enterprise.
But be careful here. Commercial and residential real estate properties cannot be part of the same enterprise. So you can have commercial and personal. In other words, it has to be similar enterprise. So if you’re doing all residential, all residentials will be part of the same enterprise as parties to claim the deduction. And also, you cannot vary the treatments, so you cannot group treatment in one year, and then do individual treatment for every property you have another year, just because it serves you better. If there’s no change of facts and circumstances, you have to be consistent from year to year. In addition to everything else I just said, the following requirements have to be met to qualify for the Section 199A deduction also known as a Qualified Business Income Deduction. You must have separate books and records for each real estate enterprise. So in other words, if you’re treating each real estate property as an enterprise, each property must have its own set of books. Also, if you’re treating similar properties as an enterprise, that enterprise, the similar properties will have its own set of books. So every single enterprise you’re claiming the qualified business income deduction for, must have its own set of books.
But taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed per year respective of the enterprise. So you must have 250 hours per year to claim the Qualified Business Income Deduction. So you must show you’re actually putting time in. However, beginning after December 31, 2022, if three of the five consecutive taxable years that end with a taxable year, you must have 250 or more hours of rental services performed per year with respect to the real estate rental enterprise.
In addition to keeping separate books and making sure you work at least 250 hours, you have to maintain all the records such as logs, reports. These reports must document your hours of all services performed. Obviously, they want to make sure you’re meeting that 250-hour requirement. So you should keep a log of that just in case you’re requested that log. Description of all services performed and date in which those services were performed. Records have to be made available for inspection at the request of the IRS. If the IRS says, “Hey, I need your record. You claim the Section 199A deduction. Where are your records?” They have to be made available.
However, the IRS is lenient. It knows it’s the first year and people probably did not know all of this stuff. So they’re not going to let it apply before January 1, 2019, but beginning this year, you better make sure you start keeping your records if you go to keep claiming the Section 199A or Qualified Business Income Deduction.
So as you go to keep your log of the 250 hours, what would you consider rental services? Well, rental services is the time you spent to advertise, to rent or lease the real estate, negotiate and execute the lease, verify information containing the tenant application, collection of the rent, your daily operation, maintenance and repair of the property, management of the real estate, purchase of materials and supervision of employees and payment of contractors. Those are all considered to be rental services. So any time you spend doing any of these services counts towards your 250 hours.
Rental services does not include time dispensed to arrange and finance property, starting the review on financial statements or reports of operations, planning management, consulting long-term capital improvements or construction of a long-term capital improvement, hours spent traveling to and from the real estate, those are not considered rental services so they do not count towards your 250 hours.
Also excluded from the safe harbor are real estate where the taxpayer actually stays… Or dependent stays on the same rental property as the person they’re renting. So that doesn’t apply if you actually stay in the residence. And also if you have a triple net lease, in other words, where the tenant is actually the one responsible for paying taxes, insurance, and all fees and taking care of the property, well, it doesn’t apply. You’re not considered to qualify under the safe harbor to take the Qualified Business Income Deduction.
Finally, to claim the tax return, you must include the statement with your tax return. The statement must state, “Under the penalties of perjury, I declare that I have examined the statement as the best of my knowledge and belief.” The statement contains all the relevant facts relating to the revenue procedure and such facts are true, correct, and complete. This must be signed and sent along with your tax return.
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