Safe harbor available for taxpayers who seek to claim the section 199A
deduction with respect to a “rental real estate
On September 24, 2019, the Internal Revenue Service issued Revenue
Procedure 2019-38, which finalized the real estate safe harbor election
initially proposed in January. This election allows for real estate owners
to treat their rental activities as a trade or business for purposes of the
20 percent qualified business income deduction. While meeting the election
requirements may not require much additional effort for taxpayers owning
real estate conglomerates, the importance of documentation and retention
has become increasingly more important for taxpayers who own, say, one or
two rental properties. Such taxpayers may want to revisit their current
recordkeeping methods to ensure they are able to reap the full benefit of
the 20 percent deduction, which could result in substantial tax dollars
Within the final literature, the IRS provides specifications and additional
clarifications on a variety of crucial aspects, such as the treatment of
mixed-use property and the implementation of the 250-hour requirement. This
article will focus on these items; however, for a more in-depth look at the
election including definitions, requirements, and implementation, please
refer to our previous article, 199A Trade or Business Safe Harbor: Rental Real Estate.
When the election was initially proposed, the IRS provided important
details regarding rental real estate enterprises (“RREE”) and
how a taxpayer may choose to group similar properties into a single
enterprise. Such groupings allow requirements such as the 250-hour rental
services to span across several properties. However, take note that
commercial and residential real estate my not be part of the same RREE.
This specification left many taxpayers with questions on how their
multi-use properties should be handled under the new rules.
Revenue Procedure 2019-38 provides that a taxpayer may choose to treat a
multi-use property, which is defined as a single property combining both
commercial and residential units, as a single RREE or bifurcate it into
separate commercial and residential interests. If treated as a single RREE,
a multi-use property may not be grouped with other residential, commercial,
or mixed-use properties. Although bifurcation may seem like the obvious
answer so rental service hours and records can be aggregated with similar
properties, the task of maintaining separate books and records for a
multi-use property between the commercial and residential units may be a
daunting enough prospect that some may decide otherwise.
Once a taxpayer decides on treatment of any multi-use property and
establishes his/her RREE(s), in order to take advantage of the 20
percent deduction the initial election literature provides the
following requirements which each RREE must meet:
1. Separate books and records are maintained to reflect income and
expenses for each RREE;
2. 250 or more hours of rental services are performed per year with
respect to each RRRE. Remember that rental service hours include not
only your hours as an owner, but also hours spent by employees and
independent contractors, such as a repairman or snowplowing service
3. Taxpayer maintains contemporaneous records, including time reports,
logs, or similar documents regarding hours, descriptions, and dates of
all services performed as well as who performed the services.
Revenue Procedure 2019-38 provides the following clarifications for
1. Any RREE containing more than one property meets the first
requirement if income and expense information statements for each
property are maintained and then consolidated.
2. RREEs in existence for less than four years must meet the 250-hour
requirement for each year of existence. However, in the event an RREE
has existed for at least four years, the 250-hour requirement must be
met in any three of the five consecutive taxable years that end with
the taxable year.
3. A taxpayer’s requirement to maintain contemporaneous records
does not apply to taxable years beginning prior to January 1, 2020.
This extension provides taxpayers with ample time to develop good
documentation habits to comply with this requirement.
Last, but certainly not least, the final literature provides the
following two additional types of property that may not be included in
a RREE and are, therefore, not eligible for the safe harbor:
1. Real estate rented to a trade or business conducted by a taxpayer or
a Relevant Passthrough Entity (“RPE”) which is commonly
2. An entire rental real estate interest if any portion of the interest
is treated as a Specified Service Trade or Business
If you have any questions about the safe harbor election or would like
further assistance in demystifying the many aspects of the new tax law,
please contact our office or your Bonadio representative.