Section 199A, Qualified Business Income, which was added to the federal tax law by the Tax Cuts and Jobs Act enacted at the end of 2017, is one of the more complex provisions ever incorporated into the law. Nearly 24 months after enactment, the provision still continues to baffle taxpayers and practitioners alike. Nowhere is the law more complex than in its application to real estate activities.
In the intervening months since passage, the Internal Revenue Service has issued an ongoing and comprehensive set of interpretive Treasury regulations, notices and other rulings to enhance the public’s understanding of the provision and its implementation.
Now, the Internal Revenue Service has issued a final revenue procedure on the safe harbor for rental real estate enterprises under Code Sec. 199A, Qualified Business Income. Revenue Procedure 2019-38 provides a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).
This revenue procedure applies to tax years ending after December 31, 2017. However, the guidance provides that for the 2018 tax year, taxpayers and relevant pass-through entities can rely on the safe harbor set forth in Notice 2019-07, I.R.B. 2019-9, 740.
The guidance in the final revenue procedure is largely the same as the earlier (2019-07). However, the key differences include:
- The contemporaneous recordkeeping requirement has been pushed to tax years beginning on or after January 1, 2020
- Real estate rented to a trade or business conducted by a taxpayer or a relevant pass-through entity (RPE) which is commonly controlled under Treas. Reg.1.199A-4(b)(1)(i) no longer qualifies for the safe harbor
- Any rental activity that constitutes a specified services trade or business (SSTB) cannot use the safe harbor
Additional regulations and clarifications included in the final revenue procedure are as follows:
- The final revenue procedure incorporates the aggregation rules in Reg. §1.199A-4. A rental real estate enterprise is treated as a single trade or business for purposes of the aggregation rules if safe harbor requirements are met. For example, a rental real estate enterprise cannot include property rented to a trade or business conducted by the taxpayer or RPE that is commonly controlled under §1.199A-4(b)(1)(i).
- The final revenue procedure clarifies how properties are combined into a rental real estate enterprise. It creates two “rental real restate categories” for combining real properties as a single enterprise – residential or commercial. It also discusses the treatment and proper categories for new rental properties and mixed-use properties.