Section 199A Deduction for Rental Properties

The new tax law brought us a new pass-through deduction to individual business owners equal to 20% of the taxpayer’s qualified business income, limited by certain levels of taxable income. In order to be able to claim the deduction, the business must first rise to the level of a Section 162 trade or business.

For those of you with rentals, the IRS offers a safe harbor providing that the rental activity will rise to the level of a Section 162 trade or business if:

  • Separate books and records are maintained for each rental activity
  • 250 hours or more of rental services are performed per year for the activity. Travel time to and from your rental does not count towards your safe harbor.
  • The taxpayer maintains contemporaneous records, including time reports or similar documents, regarding 1) hours of all services performed, 2) description of all services performed, 3)dates that services are performed, and 4) who performed the services.

For these purposes, rental services include advertising to rent, negotiating and executing leases, verifying tenant applications, collection of rent, daily operation and maintenance, management of the real estate, purchase of materials, and supervision of employees and independent contractors.

Rental of any residence that the taxpayer uses as a personal residence for more than 14 days during the year, as well as so-called triple net leases are not eligible for the safe harbor.