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This memo is extremely important tax news for anyone with positive income from rental properties.

When was the last time you had your entire income tax, rental property and financial lives properly evaluated by a CPA? Do you have full confidence that your current CPA is the right choice to advise your family and your business for the years ahead? If not, please call me immediately on (732) 673-0510. 

The Internal Revenue Service issued Revenue Procedure 2019-38 that has a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).

To read the full text of Revenue Procedure 2019-38 CLICK HERE

This goes into effect for tax years starting in 2018.

To refresh your memory, the QBI or 199A deduction will reduce the taxable income of an enterprise by 20%. So, imagine you have a $50,000 net income from a rental property. If this activity meets the requirements below, you would only pay tax on $40,000 ($50,000 – $10,000) $10,000 being 20% of $50,000.

If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the section 199A deduction. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations.

This safe harbor is available for taxpayers who seek to claim the section 199A deduction with respect to a “rental real estate enterprise.” Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant passthrough entity (RPE) relying on this revenue procedure must hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member.

The following requirements must be met by taxpayers or RPEs to qualify for this safe harbor:

  1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
  2. For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
  3. The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
  4. The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.
    For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

Questions? Concerns? Call me on (732) 673-0510.

Please reach out to me without hesitation with any tax, business or

accounting question, and to schedule a consultation.

Tax Laws are complex.

It is very easy to make mistakes that can incur penalties.

Do you have a Tax, Accounting or Business Question?

Call Me Immediately. (732) 673-0510.

Is your CPA or Attorney

ignoring your Phone Calls and Emails?

Call Me Immediately. (732) 673-0510.

Remember,

“If We Aren’t Working For You, Then You Aren’t Working At Your Best”

Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com

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