The IRS recently issued Revenue Procedure 2019-38, which finalizes the safe harbor for rental property under Code Section 199A that was originally provided in IRS Notice 2019-07. The safe harbor treats a rental real estate enterprise as being eligible for the qualified business income deduction under Section 199A, even if it does not meet the definition of a “trade or business” as provided in Treas. Reg. 1.199-1(b)(14).
The safe harbor permits a rental real estate enterprise to be treated as a Section 199A trade or business if sufficient “rental services” were performed for the enterprise. For enterprises in existence for less than four years, 250 hours of rental services are required each year. For enterprises in existence for at least four years, that requirement must only be met for three of the past five years.
The term "rental services" include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors. Importantly, these services may be performed by the owner of the enterprise, employees, or independent contractors.
The safe harbor is not available to: (i) Real estate used by the taxpayer as a residence under section 280A(d); (ii) Real estate rented or leased under a triple net lease; (iii) Real estate rented to a trade or business conducted by a taxpayer or an RPE (relevant pass-through entity) which is commonly controlled under Treas. Reg. 1.199A-4(b)(1)(i); and (iv) The entire rental real estate interest if any portion of the interest is treated as an SSTB (specified service trade or business) under § 1.199A-5(c)(2).