IRS And Treasury Finalize Section 199A Rental Real Estate Safe Harbor Guidelines

The Treasury Department and the IRS recently issued Revenue Procedure 2019-38, providing a safe harbor under which certain rental estate activities will be treated as a trade or business solely for purposes of the new pass-through deduction regime Section1 199A.2 The revenue procedure finalizes proposed guidelines released in January,3 discussed here, and sets forth the procedural requirements for using the safe harbor. A failure to satisfy the requirements of this safe harbor does not preclude a taxpayer from otherwise establishing that an interest in rental real estate is a trade or business for purposes of Section 199A. Taxpayers relying on the safe harbor may be entitled to a 20 percent deduction for net rental income (but not capital gains) derived from a qualifying enterprise under Section 199A. However, taxpayers should be aware that claiming that a rental real estate enterprise is a trade or business may have unexpected consequences, such as additional reporting and, in certain cases, a limitation on the deductibility of interest expense.

Under 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 multiple properties. A taxpayer must treat each property separately or all similar properties, in general, as a single enterprise. Commercial and residential properties must be treated as separate enterprises. Once a taxpayer treats similar properties as a single enterprise under the safe harbor, the taxpayer must continue to treat interests in such properties, including newly acquired properties in the same category, as a single enterprise. However, if a taxpayer chooses to treat each property as a separate enterprise, it may in the future elect to treat all similar commercial or residential properties as a single enterprise.

The revenue procedure adds a new rule providing that mixed-use property (single building with residential and commercial units) may be treated as a single enterprise or bifurcated into separate residential and commercial interests. Mixed-use property that is treated as a single enterprise cannot be combined with other residential, commercial or mixed-use property. A rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the particular tax year:

Separate books and records must be maintained to reflect income and expenses for each rental real estate...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT