Businesses & Rental Properties: A New 20% Deduction Should Be On Your Radar

By: Corry Hunter, CPA, Osborne Rincon CPAs

Early this year, the IRS released Notice 2019-07 in regards to the Internal Revenue Code (IRC) Section 199A and the Trade or Business Safe Harbor for Rental Real Estate.

On the surface, the notice makes it look as though most rentals will not qualify for section 199 unless you meet the “safe harbor” criteria. However, it should be noted: "If an enterprise fails to satisfy these requirements, the rental real estate enterprise may still be treated as a trade or business."

Here are the basic requirements of the safe harbor:

A.     Separate books and records are to be maintained.

B. 250 or more hours of rental services must be performed.

C. The taxpayer must maintain contemporaneous records – including time reports, logs, or similar documents. Such records are to be made available for inspection at the request of the IRS.

 The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

The largest hurdle for most will be the 250 hours. While the total hours need not be performed by you, it is a significant amount of time. It breaks down to about 5 hours per week or 20 hours per month.

The good news is that your gardener and pool cleaner’s time count toward your total (maybe 8 hours per month combined), but it would be hard for a landlord of a single-family residence to spend more than a few hours a month to get the required 20 hours for the safe harbor.

What makes a rental property otherwise qualify as a "trade or business" is not clearly defined in the IRC code. What you can do is solidify the position that your rental is a trade or business.

You should keep separate books and records that are maintained contemporaneously, which are available for the IRS upon request. In other words – if you want the deduction, do not show up to get your taxes done with a shoebox full of receipts. If you keep a separate bank account and list income and expenses of the rental by month, you are on the right path. 

Furthermore, if you keep a calendar for your rental activities as well as what you were doing that day, you now have a time log. This will take more time for rental owners, but if it is the difference of a 20% tax deduction, the effort should pay off.

For more information call Osborne Rincon CPAs at 760-777-9805.