Safe Harbor Guidance for Rental Real Estate
The IRS has released Revenue Procedure (“Rev. Proc.”) 2019-38 that grants a safe harbor for rental real estate to be treated as a qualified trade or business, helping certain real estate businesses qualify for the 199A deduction. The safe harbor qualifications for businesses include meeting the definition of a rental real estate enterprise, performing a minimum number of rental services hours, and keeping specific records.
For purposes of the safe harbor, a rental real estate enterprise is defined as 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.
For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services must be performed 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 ending with the taxable year, 250 or more hours of rental services must have been performed per year.
Additionally, taxpayers must keep separate books and records pertaining to each rental real estate enterprise, including contemporaneous documentation of hours, description, dates, and performed by whom for all rental services performed. A statement must also be attached to a timely filed return stating reliance on the safe harbor each taxable year.
A notable change from Notice 2019-07 to the Rev. Proc. is how to treat mixed-use properties under the safe harbor. An interest in a mixed-use property may be treated as a single rental real estate enterprise or may be bifurcated into separate residential and commercial interests. Mixed-use property is defined as a single building that combines residential and commercial space. Mixed-use property, if treated as a single rental real estate enterprise, cannot be part of the same property as other residential, commercial, or mixed-use property.
The Rev. Proc. explicitly identifies certain types of real estate that do not qualify for the safe harbor. Real estate that is used as a personal residence, rented under a triple net lease, or rented to a trade or business conducted by the taxpayer does not qualify under this safe harbor.
This Rev. Proc. applies to taxable years ending after December 31, 2017. Alternatively, taxpayers may rely on the safe harbor set forth in Notice 2019-07 for the 2018 taxable year.
If you are uncertain whether you qualify to use the rental real estate safe harbor or have any other questions regarding section 199A, please contact your trusted Cherry Bekaert C/AM team tax advisor. We are here to help guide you forward.