Lighthouse Consultants
Mar 22, 2023
Rental Real Estate & Sec. 199A: Hours & Records for Business Treatment
Solely for the purposes of Code Sec. 199A, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year with respect to the rental real estate enterprise:
Requirements for Qualification
To qualify as a trade or business under Section 199A, a rental real estate enterprise must meet the following criteria during the tax year:
Separate Records: Maintain separate books and records reflecting income and expenses for each rental property.
Rental Service Hours: Perform a minimum number of rental services as defined below:
Before January 1, 2023: At least 250 hours of rental services per year for the rental enterprise.
After December 31, 2022: At least 250 hours of rental services per year in at least three of the five consecutive tax years ending with the current tax year (or every year for enterprises held less than five years).
Recordkeeping: Maintain contemporaneous records that document the following details:
Total hours of all services performed.
Description of all services performed.
Dates on which services were performed.
Who performed the services.
These records must be available for inspection by the IRS upon request. (Note: This requirement applies to tax years beginning after December 31, 2018.)
Definition of Rental Services
For purposes of this safe harbor, rental services include:
Advertising rental properties.
Negotiating and finalizing leases.
Verifying information from prospective tenants.
Collecting rent.
Daily operations, maintenance, and repairs of the property.
Managing the real estate.
Purchasing materials.
Supervising employees and independent contractors.
These services can be performed by the owner, employees, agents, or independent contractors of the owner.
Excluded Activities
The following activities are not considered rental services:
Financial or investment management activities (e.g., arranging financing, procuring property, reviewing financial statements).
Planning, managing, or constructing capital improvements.
Travel time to and from the property.
Ineligible Properties
Properties used as a residence for any part of the year under Code Sec. 280A by the taxpayer, owner, or beneficiary relying on this safe harbor are not eligible.
Properties rented or leased under a triple net lease (NNN) are also ineligible. A triple net lease requires the tenant to pay taxes, fees, insurance, and be responsible for maintenance activities in addition to rent and utilities.
Effective Date
This safe harbor is proposed to apply to tax years ending after December 31, 2017.
Disclaimer
Taxpayers may rely on this proposed safe harbor until its finalization to determine if a rental real estate enterprise qualifies as a trade or business under Section 199A.
For more information or to consult with a tax professional for more specific advice, please feel free to contact us.