If you are planning to invest in Park City real estate or other areas of Utah, there are important tax laws to consider as you go through the purchasing process. A highly respected local Park City CPA, Chip Higgins, CPA, explains a bit about rental tax laws and the Qualified Business Income Deduction below.
The Qualified Business Income (QBI) Deduction (aka the 20% pass-through deduction) is a new and revolutionary provision of the Tax Cuts & Jobs Act. Internal Revenue Code Section 199A provides a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of the taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. This deduction is only allowed for “qualified trade or business income”. Since the law was signed over a year ago, an unanswered question was if and when a rental activity is a qualified trade or business.
The IRS has released a Proposed Revenue Procedure that provides a safe harbor to allow certain rental real estate enterprises to be treated as a trade or business for purposes of the QBI deduction.
To use the safe harbor the taxpayer is required to:
1. Maintain separate books and records for each rental activity (or the combined enterprise if aggregated together),
2. Demonstrate that 250 hours or more of “rental services” per year for the activity (or combined enterprise) were performed by the owners, employees or independent contractors with respect to the enterprise, and
3. Maintain contemporaneous records, including time reports or similar documents, regarding (1) hours of all services performed, (2) description of all services performed, (3) dates on which such services are performed, and (4) who performed the services.
4. 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 services do not include financial or management activities in the owner’s capacity as an investor such as arranging financing, procuring property, studying and reviewing financial statements on operations, planning, managing or constructing long-term capital improvements, and hours spent traveling to and from the rental property.
The taxpayer may choose to aggregate all similar rentals into one enterprise, perhaps making it easier to meet the 250-hour test (or the asset test for high-income individuals). However, the regulations do not allow commercial rentals and residential rentals to be aggregated as the same activity. Taxpayers may not vary this treatment from year-to-year unless there has been a significant change in facts and circumstances.
Real estate used by the taxpayer as a residence for any part of the year under Sec. 280A is not eligible for this safe harbor. This includes a taxpayer’s principal residence (such as an Air BNB) and personal use for more than 14 days of a vacation home.
Property leased under a triple net lease is also not eligible for the safe harbor. A triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities.
Form 1099 Filings
The regulations require that if you treat the rental activity as a trade or business, the taxpayer must file all required Forms 1099. If you’re going to argue that your rental is a trade or business, you’ll have to treat it like a trade or business.
A taxpayer must include a statement attached to the return on which it claims or passes through the QBI deduction information that the requirements in this revenue procedure have been satisfied.
If you have questions about real estate tax laws, contact:
Chip Higgins, CPA
1960 Sidewinder Drive
Park City, UT 84060
For any of your real estate concerns, please contact Jensen and Company. You can also learn more by reading our blog.