What you need to know:
The Safe Harbor applies to taxpayers who have "an interest in real property held for the production of rents and may consist of an interest in a single property or interests in multiple properties."
KEY - Safe Harbor allows rental real estate enterprises to receive a 20% qualified business income deduction for tax purposes.
If an interest fails to satisfy the requirements of the Safe Harbor, it's still possible to qualify for the 199A deduction by otherwise meeting the definition of a trade or business as set forth in 199A.
Some Notes:
- Multiple Properties - If a taxpayer has an interest in multiple properties, commercial & residential properties can't be combined for the deduction.
- "Mixed Buildings" - In a single building with both residential & commercial purposes (e.g., a storefront with apartments above), property owners have 2 options; 1) treat the property as a single rental real estate enterprise; or 2) separate the interest into both residential & commercial interests.
- Less Flexibility - Taxpayers also can't change the forms of their interests from year-to-year (i.e., filing multiple properties as a single interest one year, and then filing them as separate interests the next).
Safe Harbor Requirements:
- Separate books & records are maintained to reflect income for expenses for each rental real estate enterprise;
- Records should reflect 250+ hours of rental services for each year;
- Records should also reflect time logs (or similar documents) that show: (i) the amount of hours for all services performed; (ii) descriptions of all services performed; (iii) dates when the services were performed; & (iv) names of persons/companies performing the services; and
- A statement attached to a filed original return that outlines the information about the real estate enterprise(s) & why the deduction is being sought by the taxpayer.
**IMPORTANT**: The record requirement will not apply to taxable years beginning before 1/1/2020.
"Rental Services"
Rental Services can be performed by property owners, or by their employees, agents, and/or independent contractors.
LANDLORDS: Keep logs of rental services and receipts to see if you qualify for the Safe Harbor deduction.
