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...
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