Section 199a and Rentals

According to Revenue Procedure 2019-7, the IRS offers a safe harbor providing that a rental activity or multiple rentals if the taxpayer chooses to treat them as a combined enterprise will qualify as a Section 162 trade or business if:

  • separate books and records are maintained for each rental activity (or the combined enterprise if grouped together),

  • 250 hours or more of "rental services" are performed per year for the activity (or combined enterprise), and

  • taxpayer maintains contemporaneous records, including time reports or similar documents, regarding hours of all services performed, description of all services performed, dates on which such services are performed, and who performed the services

For these determinations, rental services include advertising to rent, negotiating and executing leases, tenant application administration, collection of rent, operation and maintenance, management of the real estate, purchasing materials, and supervision of employees/independent contractors.

Caveats to the 199a Deduction for Rentals

  • Taxpayer cannot use the safe harbor for the rental of any residence that the taxpayer uses as a personal residence for more than 14 days during the year

  • Taxpayer cannot use the safe harbor for any property rented on a triple net basis, which is any lease where the landlord passes on the responsibility for paying real estate taxes, insurance, and maintenance to the tenant

Self-Rentals 

Final regulations do provide an exception to the trade or business requirement for rentals where as it will be treated as a Section 162 trade or business if it is rented to a commonly controlled trade or business owned by the taxpayer. The property must be rented to an individual or pass-through and the same owner or group of owners must own 50% or more of both the property and business.

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