Concurrent with the Section 199A final regulations, the IRS released a proposed Revenue Procedure in order to provide a safe harbor that rental real estate businesses can rely upon in order to qualify as “trades or businesses” for purposes of taking advantage of the new 20 percent deduction for qualified business income of certain pass-through entities.
Rental real estate business owners will qualify as trades or businesses, so that they can claim the 199A deduction, if the entity (1) maintains separate books and records for each rental enterprise, (2) is involved in the performance of at least 250 hours of rental real estate services each year (these services can be performed by employees or independent contractors of the business), and (3) maintains contemporaneous records regarding the rental real estate services that are performed each year. Notably, if the real estate is rented or leased under a triple net lease, the safe harbor is unavailable.
We asked Professors Robert Bloink and William Byrnes, who write for ALM’s Tax Facts and hold opposing political viewpoints, to their opinions on the new rental real estate carve out and its implications going forward.
Below is a summary of the debate that ensued between the two professors:
Byrnes: I’m all for this clearly laid out safe harbor, it gives rental real estate professionals specific guidance as to whether they will qualify for the new deduction, and lets them move forward knowing whether they will be characterized as a trade or business and able to take the deduction.
Bloink: While I applaud the IRS for releasing the 199A final regulations so quickly, I think that this is yet another issue that they’ve simply kicked down the road. Addressing issues in a piecemeal fashion is only going to create more confusion, make it difficult for clients to engage in efficient planning and also add to future litigation of the issue.
Byrnes: I don’t find any confusion in the safe harbor—it follows guidance similar to the rules that apply to rental real estate professionals in the passive activities context, so the safe harbor should be simple and easy to apply. It’s really as clear as we could have hoped for.