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Part 2 - Qualifying Your Rental Activities for the 20% Business Income Deduction

This is Part 2 of a Two-Part series on applying the Qualified Business Income Deduction (QBID) rules to rental activities.

Two weeks ago, in Part 1, we shared the new IRS "safe-harbor" guidelines for determining whether your rental activities qualify for the QBID.

In this Part 2, we'll discuss the practical implications of the safe-harbor guidelines and furnish advice on what to do the last several months of 2019.

The New IRS "Safe-Harbor" Guidelines - Practical Implications

As we described in Part 1, the IRS issued guidance earlier this year to provide taxpayers a Safe Harbor in determining whether their rental properties and activities qualified as a trade or business, and thereby qualifying for the Qualified Business Income Deduction.
 
The Safe Harbor guidance centered on three key elements - book & records, hours and timekeeping.
 
Although there are nuances and a few unanswered questions, the three elements are clear enough for most taxpayers to decide whether to make the attempt to comply with them.
 
For example, take the 250-hour annual threshold. For someone who owns a single rental property, it is unlikely they (or their service providers) will collectively spend anywhere close to 250 hours to manage the property in a single year. Even the landlord who inadvertently rents to the TFH (Tenant from Hell) won't likely spend 250 or more hours cleaning up the mess.
 
How about record keeping? The first and third elements of the Safe Harbor require the maintenance of books and records, as well as detailed time records. If you're not into this level of detail and spending a lot of time tracking activities, you now have enough guidance to make an informed decision. In addition, you'll need to obtain time records for your third-party service providers, who may be reluctant to share that information with you.
 
Another key consideration is an understanding of how the QBID calculation is made. It is a deduction based on the net income generated by the rental property. Many of the rental properties we see on the tax returns of our clients report a net loss. Generally, we only see a profit in the form of a capital gain when the property is sold. Since capital gains are not included in the QBID calculation, it would be unwise to qualify your rental property losses for QBID.
 
On the other hand, if your rental properties produce profits and you feel you have a shot to qualify under the Safe Harbor, we say go for it! Along the way, here are some tips for compliance:
  1. Set up an Excel file to track income and expenses. This will be particularly helpful if you deposit the income and pay the expenses out of the same bank account for all your other personal activities. Better yet, consider a separate bank account for tracking your rental activities, particularly if you elected combine all your rental activities into a single Rental Real Estate Enterprise (RREE).
  2. Adopt a time keeping method and use it consistently. Again, an Excel file may be a simple way to track dates, hours and activities.
  3. Have your third-party service providers furnish the hours they spend on behalf of your properties when they invoice you for services. Enter this into your time keeping records and keep score!
  4. Be sure to obtain a Form W-9 from your service providers. Just like any other trade or business, you'll be required to furnish a Form 1099 each January for any service provider to whom you paid $600 or more in a calendar year.
  5. Begin catching up. The Safe Harbor rules are effective for 2019, and we are 2/3rds of the way through this year. Catching up now will avoid a rush next year during tax time.
If you have questions or are curious how these rules apply to your particular situation, give us a call. We're more than happy to navigate you to the right conclusion.
 
Also, be sure to check out and subscribe to our Have an IPA With a CPA YouTube channel. Robyn and Paul recently shot a video about the new Safe Harbor rules, which will be published to the channel soon, along with many other videos on tax and business planning topics. Videos were shot at Grimm Brothers Brewhouse and Verboten Brewing in Loveland, Colorado. Each video features a beer from the brewery's lineup. We hope you find them fun and informative!


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