If you are a landlord, what changes need to be made to assure that you can be considered to be an active trade or business to qualify for the Section 199A deduction if you have net income from the rentals?
Internal Revenue Code Section 199A was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), and slightly modified in 2018. This provision provides a tax deduction of up to 20% of the net income that a taxpayer receives from an active trade or business, which may include rental real estate and professional practice income other than wages.
A new Notice (IRS Notice 2019-7) provides a safe harbor that can enable landlords to be sure that they will qualify as an active trade or business to receive this deduction, assuming that they do not have triple net leases.
The requirements include having the taxpayer and other individuals and contractors spend at least 250 hours per year engaging in landlord related duties, which can include building repair and maintenance, spending time with tenants, collecting rent, verifying information contained in tenant applications and advertising to rent or lease the property or properties. The time spent will not include doing things like arranging for financing, purchasing properties, studying and reviewing financial statements or reports and time spent traveling to and from real estate.
Also, contemporaneous records need to be kept. You can read this Notice on your own and have a pretty good understanding of what it means, but always ask a tax advisor how this applies to you and what you would need to do to qualify for the deduction.
The new regulations also indicate that triple net leased properties cannot be aggregated to test whether a taxpayer has a commonly owned trade or business. Many landlords should approach tenants to ask about renegotiating lease terms by increasing the rent and landlord’s responsibilities and services to qualify under this new safe harbor.
This is a complicated area of tax law. It is strongly recommended that a tax lawyer be consulted who is familiar with these rules.