New Rental Real Estate Recordkeeping Practices For Property Owners

Rental Real Estate
Recordkeeping Practices for
Property Owners for QBID
Purposes
Dana Lee, CPA,
Senior Manager

Today’s Outline
Qualified Business Income Deduction (QBID); §199A
Rental Real Estate Safe Harbor; Notice 2019-07
250 Hour Requirement for Safe Harbor
Recordkeeping Requirements for Safe Harbor
Other Ways for Rental Real Estate to Qualify for QBID;
§162
Self-Rentals as Trade or Business; §1.199A-4(b)(1)(i)

Qualified Business Income Deduction (QBID)
Generally, the deduction equals 20% of Qualified
Business Income
Limited for Specified Services Trades or Businesses
(SSTB’s)
Overall Limitation:
 Taxable Income (net of Capital Gains/Qualified Dividends)

Qualified Business Income Deduction (QBID)
2019 Limitations –Thresholds
Married Filing Joint (MFJ)
 Taxable Income between $321,400 – $421,400
 Phase in/out Range of $100,000
Married Filing Separately (MFS)
Taxable Income between $150,725– $160,725
Phase in/out Range of $50,000
Others (Single, HOH, Trusts, Estates)
 Taxable Income between $150,700 – $160,700
 Phase in/out Range of $50,000

Deduction Calculation: Qualified Trade or
Business Summary
Non-Service Service (SSTB)
Taxable income less than
$321,400 (MFJ 2019)
20% deduction 20% deduction
Taxable income greater
than $321,400 but less
than $421,400
Limitation phased in Deduction phased-out
Taxable income greater
than $421,400
Wage/Capital Testing No Deduction

Rental Real Estate Safe Harbor
To qualify for the safe harbor under Notice 2019-07,
taxpayers make a choice to:
 Either treat all similar rental properties as a single enterprise
or
 Treat each property as its own separate enterprise.
 Residential real estate and commercial real estate would
not be considered similar, and thus, must be considered
separate enterprises.

Rental Real Estate Safe Harbor – 250 Hour
Requirement
To qualify, for the Rental Real Estate Safe Harbor, for each real estate
enterprise, you must provide at least 250 hours of “rental services”
 “Rental Services” include work related to maintaining the
real estate such as:
• (1) advertising to rent,
• (2) negotiating and executing leases,
• (3) verifying information,
• (4) collection of rent,
• (5) daily operation, maintenance and repair of property,
• (6) management of real estate,
• (7) purchase of materials, and
• (8) supervision of employees and independent contractors.

Requirement
The 250 hours does not include:
Any hours related to financial or investment
management services
Hours spent procuring property
Any hours related to travel time to and from properties

Requirement Example
Ida Mae owns four residential rental condominiums.
Ida Mae can treat each property as a single property,
which means she would need to have 250 hours in each
property, which totals 1,000 for the year.
Conversely, Ida Mae could elect to group all four
properties as a single enterprise, whereas she would
only need 250 total hours!

Rental Real Estate Safe Harbor Hours
250 hours of rental services
 For 2018 through 2022, 250 or more hours of rental services
performed/year/rental enterprise
 For 2023 and later, in any 3 of 5 consecutive years that end with
year (or in each year for an enterprise held > five years), 250 or
more hours/year
 The 250 hours of service is for each real estate enterprise
• If multiple properties are grouped as one rental real estate enterprise,
the 250 hours is needed for the overall rental enterprise.
• However, if multiple properties are not being grouped as one rental real
estate enterprise, you could have multiple real estate enterprises. In this
case, each property would be a single enterprise and would need to
meet the 250 hours.
 Rental services may be performed by owners, employees, agents
and/or independent contractors

Other Rental Real Estate Safe Harbor
Requirements
Separate books and records must be maintained for each real
estate enterprise
Must also include a statement on the return signed under
penalties of perjury verifying that the rental enterprise meets
the above requirements.
The taxpayer’s real estate must be directly owned by an
individual or eligible pass-through entity (or through a
disregarded entity)
 If the individual owns the rental properties, they would make the
election on the individual return
 If a pass-through entity owns the rental properties, the pass-through
entity would make the election on the entity’s tax return.

Recordkeeping
Recordkeeping Requirements
 Contemporaneous records must be kept beginning after
1/1/19.
Contemporaneous records, including time reports, logs,
or similar documents, regarding the following:
 hours of all services performed;
 description of all services performed;
 dates on which services were performed; and
 who performed services

Recordkeeping
REA Template for Hours Log:
This will be available if you would like to use it. Just
remember date, hours, who performed and what was
done.
Note you should not vary treatment from year to year
unless significant change in facts and circumstances

Exceptions to the Rental Real Estate Safe
Harbor
Safe harbor does not apply to real estate rented or leased
under a triple net lease whereby the tenant or lessee is
required to pay:
 taxes,
 fees, and
 insurance, and
 to be responsible for maintenance activities for a property in
addition to rent and utilities.
This safe harbor does not apply to real estate used by the
taxpayer (including an owner or beneficiary of an RPE relying
on this safe harbor) as a residence for any part of the year
(under §280A).

What if my business does not qualify for the
safe harbor?
Real Estate Professional
§162 Trade or Business
Self-Rental

Real Estate Professional & QBID
To claim the QBID on rental real estate, the activity must
be deemed to be a trade or business.
Rental activities engaged in by a real estate
professional are deemed to be a trade or business and
thus qualifies for QBID.
To be a real estate professional, a taxpayer must
 provide more than one-half of his or her total personal
services in real property trades or businesses in which he or
she materially participates and perform more than 750 hours
of services during the tax year in real property trades or
businesses.

Other Ways Rental Real Estate May Qualify
for QBID
In order for a rental real estate activity to qualify for
QBID, it must first qualify as a trade or business under
the QBID regulations and rules.
Treas. Reg. § 1.199A-1(b)(14) defines a “trade or
business” as a “trade or business” as defined under
Section 162.
Section 162 does not provide a clear definition in that it
only states that expenses can be deducted when they
are incurred for a legitimate and active trade or business.
Since section 162 is not defined in the regs, case law
must be consulted.

Is Rental Real Estate a Business?
In Groetzinger (US S Ct, 480 US 23 (1987)), the
Supreme Court ruled:
 To rise to the level of a trade or business, taxpayer must be
involved in activity with continuity and regularity…
 A sporadic activity, a hobby or an amusement diversion does
not qualify.

May a single family residence be a business?
 Yes: LaGreide, (23 TC 508, 512 (1954)) Rental of single
family property = business
 Yes: Reiner, (7th Cir. (222 F. 2d 770 (1955)) Rental of single
family property (w/ use of mgmt. co.) = business (cited
LaGreide)
 Yes: Hazard, (7 TC 372 (1946)) Rental of single family
property, owner lived in different city
 Yes: Murtaugh, (TCM 1997-319) Rental of 2 timeshares,
heavy mgmt. co. activity (post Groetzinger case)

May a single family residence be a business?
 No: Grier, 2nd Cir. 1955 (218 F2d 603) Rental of single
family property, 1 tenant, landlord made repairs (this case
goes against taxpayer)
 No: Balsamo (TCM 1987-477) Rental of single family
property, no repairs, sold after owned 3 mos. after inherited
(Tax Court followed 2nd Cir. (bound by Golsen rule))
• Golsen rule is that the Tax Court may render different decisions,
based on identical situations, for taxpayers that are differentiated
only by the geographical area in which the Tax Court case is
decided.

May a triple net lease be a business? It’s facts and
circumstances:
 No: Union Bank of Troy, DC NY, 195 F. Supp 382 (1961)
Triple net lease, building maintained by tenant (2nd Cir.
Golsen)
 No: PLR 8350008 Triple net lease, building maintained by
tenant (IRS adopts “facts and circumstances” approach)

Rental Real Estate – Self Rental
Rental or licensing of tangible (or intangible) property (rental
activity) that does not rise to level of §162 Trade or Business
is nevertheless Trade or Business for §199A, if:
 Property is rented (or licensed) to a Trade or Business conducted
by an individual (or pass through entity) commonly controlled under
§1.199A-4(b)(1)(i) (AKA Self Rental)
 This is regardless of whether the rental activity and Trade or
Business would otherwise be eligible to be aggregated under
§1.199A-4(b)(1)
IMPORTANT NOTE: Treas. Reg. Section 1.199A-1(b)(14)
clarifies this rule to provide that the related lessee or
licensee must be an individual or RPE. (cannot be a C
Corporation!)

Rental Real Estate – Self Rental & SSTB
BUT, the rental business is treated as SSTB to the extent it
provides property or services to a commonly controlled SSTB,
portion of property or services provided to SSTB creates
SSTB income.
Common control (Prop. §1.199A-5(c)(2)):
 An SSTB includes any trade or business that:
• Provides 50% or more of property or services to SSTB; and
• The 2 businesses have 50% or > common ownership (person or group
own(s) 50% or more (per §§267 and 707 attribution))
 Example: Dentist owns dental practice and her own building. Rents
100% of building to dental practice.
• 100% of rental income is SSTB income

Rental Real Estate – Self Rental & SSTB
If business provides < 50% of property or services to a
commonly controlled SSTB, entire business is not SSTB,
but any income earned from providing (property or
service) to SSTB is treated as SSTB income.
 Example – Dentist owns dental practice and her own building.
Rents 50% of building to dental practice, 50% to others.
 Thus, 50% of rental income is SSTB income, other 50% is not
SSTB income.

Disclaimer
These materials do not constitute tax or legal advice, and
cannot be relied upon for purposes of avoiding penalties
under the Internal Revenue Code. These materials may
omit discussion of exceptions, qualification, definitions,
effective dates, jurisdictional differences, and other relevant
authorities and considerations. In no event should a reader
rely on these materials in planning a specific transaction.
Rea and Associates will not be responsible for any error,
omission, or inaccuracy in these materials.

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