Welcome News for Owners of Rental Real Estate
In September of last year, I published an article in the KRS Holdings newsletter entitled … New Tax Rules – Residential Landlords Are Winners. I cautioned readers of that article that I am not a professional when it comes to interpreting tax law. That said, you are urged to meet with your tax advisor and seek professional guidance for the specifics of TCJA as it may apply to your unique circumstances. Here, I only present my understanding of the provisions of the revised Act and how I think it presents unique advantages to residential rental investors.
The new tax law, TCJA, permits a tax deduction of up to 20 percent of Qualified Business Income (QBI), with some limits and exceptions. It appeared that most rental activity qualifies, for tax purposes, as a business. This means landlords may deduct 20% of net rental income over and above all other rental-related deductions. Net result … only 80% of rental income will be taxed. That said, as with any new regulation, there were questions left unanswered or at best ambiguous as it relates to owners of rental real estate.
Welcome clarifying news was delivered to real estate investors by the IRS … final regulations for the QBI deduction. IRS Notice 2019-07 details the safe harbor for certain real estate enterprises to claim the deduction. Here’s my understanding of the key provisions for an eligible rental business to claim the deduction.
- Each rental enterprise must maintain separate books and records of income and expenses.
- At least 250 hours of rental services must be performed for the enterprise through 2022.
- After tax year 2018, the tax payer must maintain records of income, expenses, hours and description of dates services performed and by whom.
The QBI deduction is just one of several potential perks for real estate investors allowed under the new tax law. There are additional clarifications that are best discussed with guidance from your tax advisor as the qualifications can be somewhat complex depending on the specifics of your circumstances.