Last Friday, the IRS issued a proposed revenue procedure that provides a safe harbor for rental real estate enterprises to be treated as a "trade or business" for purposes of section 199A.
To qualify for the safe harbor, the following three requirements must be satisfied by the taxpayer:
- Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise;
- At least 250 or more hours of rental services must be performed per year with respect to each rental enterprise. For taxable years beginning after December 31, 2022, this condition is satisfied for a tax year if 250 hours of services are provided in any three of the five consecutive tax years that end with that year.
- The taxpayer must maintain contemporaneous records, including time reports, logs, or similar documents regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
For purposes of the safe harbor, rental services include: advertising to rent or lease the real estate; negotiating and executing leases; verifying information contained in prospective tenant applications; collection of rent; daily operation, maintenance, and repair of the property; management of the real estate; purchase of materials; and supervision of employees and independent contractors.
To qualify for the safe harbor, it is not necessary that the services are performed by the owner — the services also may be performed by employees, agents, or independent contractors of the owner. However, the safe harbor will not apply if the real estate is leased under a triple net lease, which includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for the maintenance activities. In addition, the safe harbor will not apply for any taxable year during which the property was used for any period of time by the taxpayer as his residence.
The information provided above is written by Attorney Blake D. Lewis of Friday, Eldredge & Clark, LLP. Blake is an associate in the firm’s Mergers and Acquisitions Practice Group. Blake's practice focuses on taxation, mergers and acquisitions, real estate transactions, tax controversies, entity formation and governance, and franchising.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Mergers and Acquisitions Attorneys.