IRS Posts FAQs Regarding Rental Real Estate in Context of QBI Deduction

On November 20, 2019, the IRS posted a series of Frequently Asked Questions (FAQs) which includes much needed guidance regarding rental real estate in the context of the Qualified Business Income (QBI) deduction under Internal Revenue Code (IRC) §199A.1A few of the particularly noteworthy FAQs include: (1) when rental real estate is treated as a trade or business; (2) when a rental real estate enterprise is eligible to rely upon the Revenue Procedure 2019-38 safe harbor; and (3) whether the income, gain, deduction and losses are from the rental QBI if the real estate is rented to a C corporation.

First, the IRS provides that rental real estate is treated as a trade or business for purposes of the QBI deduction if it satisfies any of the following tests:

  1. The rental real estate rises to the level of a [IRC §]162 trade or business.
  2. The rental real estate is a rental real estate enterprise meeting the requirements of the safe harbor provided in Revenue Procedure 2019-38. See Q49.
  3. The rental or licensing of property is to a commonly controlled trade or business operated by an individual or a passthrough entity as described in Treas. Reg. § 1.199A-1(b)(14). This is often referred to as a self-rental.2

Next, the IRS provides that a rental real estate enterprise is eligible to rely upon the Rev. Proc. 2019-38 safe harbor if it satisfies all of the following:

  1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. If a rental real estate enterprise contains more than one property, this requirement may be satisfied if income and expense information statements for each property are maintained and then consolidated;
  2. For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed (as described in Revenue Procedure 2019-38) per year with respect to the rental real estate enterprise. For rental real estate enterprises that have been in existence for at least four years, in any three of the five consecutive taxable years that end with the taxable year, 250 or more hours of rental services are performed (as described in Revenue Procedure 2019-38) per year with respect to the rental real estate enterprise; and
  3. The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. If services with respect to the rental real estate enterprise are performed by employees or independent contractors, the taxpayer may provide a description of the rental services performed by such employee or independent contractor, the amount of time such employee or independent contractor generally spends performing such services for the enterprise, and time, wage, or payment records for such employee or independent contractor. Such records are to be made available for inspection at the request of the IRS.
  4. The taxpayer or RPE attaches a statement to a timely filed original return, including extensions, (or an amended return for the 2018 taxable year only) for each taxable year in which the taxpayer or RPE relies on the safe harbor. An individual or RPE with more than one rental real estate enterprise relying on this safe harbor may submit a single statement but the statement must list the required information separately for each rental real estate enterprise. The statement must include the following information:
    • A description (including the address and rental category) of all rental real estate properties that are included in each rental real estate enterprise;
    • A description (including the address and rental category) of rental real estate properties acquired and disposed of during the taxable year; and
    • A representation that the requirements of this revenue procedure have been satisfied.3

Additionally, the IRS clarifies in the final FAQ that:

Rentals to a C corporation can generate QBI if the rental real estate is conducted by an individual or a relevant passthrough entity (RPE) and is a [IRC §]162 trade or business or a rental real estate enterprise under Revenue Procedure 2019-38. The self-rental rule in Treas. Reg. § 1.199A-1(b)(14) does not apply to rentals to C corporations.4

While this guidance is very helpful, the IRS reminds taxpayers that FAQs are not able to be relied upon as legal authority (i.e., one may not use the information to support a legal argument in a court case).

If you have anyquestions or concerns regarding rental real estate status for purposes of the QBI deduction, contact Frost Law today at 410-497-5947.

1IRS Website Update, QBI FAQs (Nov. 20, 2019), which can be found at https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs#rental.

2IRS Website Update, QBI FAQs, Q48. (Nov. 20, 2019).

3IRS Website Update, QBI FAQs, Q49. (Nov. 20, 2019).

4IRS Website Update, QBI FAQs, Q59. (Nov. 20, 2019).

Tags: Blog, IRS, Tax Topics

RECENT Blog

RECENT Articles