Section 199A Safe Harbor Rules for Rental Properties

We have seen a growing number of clients invest in the real estate market. With the passing of the Tax Cuts and Jobs Act, some of these rental properties have been eligible to claim a 20% deduction based on their net profit. However, not all rental properties are eligible for this new tax deduction.

For the rental real estate to be eligible for the 20% deduction, the real estate activity must be considered a trade or business. This of course generates the question of whether your specific rental property will be considered a trade or business by the IRS. Fortunately, the IRS has listed a few “safe harbor” rules for you to meet to have your rental considered a trade or business.

The safe harbor rules that taxpayers must meet to qualify for the 20% deduction are:

  • Maintain separate books and records of the real estate income and expenses.
  • 250 or more rental service hours are performed in respect of the rental real estate. Service hours can be performed on advertising the property, negotiating leases, processing and reviewing tenant applications, collecting rent, daily operation and maintenance, management of the real estate, purchasing materials, and supervision of employees/independent contractors.
  • Contemporaneous records are kept indicating the hours of all services performed, description of services, dates of services, and who performed the services. This is effective for individuals starting with their 2019 tax return.
  • Attach a statement to your tax return indicating you satisfied the safe harbor requirements listed above

For taxpayers that don’t meet the safe harbor rules above, you still may be eligible to claim the 20% deduction related to your rental real estate. Whether you are eligible will be determined based on your individual facts and circumstances. If you would like to discuss your eligibility relating to the new 20% deduction, contact us here.