Safe Harbor Rules for Rental Properties to Qualify for a 20% Tax Deduction

Beginning in 2018 most businesses will qualify for the new 20% deduction on Qualified Business Income. In order to qualify for this deduction, you must prove your activity rises to the level of a business.   The IRS considers most rental property as an investment and not a business.

If it is a self-rental, meaning my LLC owns a building that rents to my S-Corporation, my rental LLC automatically qualify as a business and gets the deduction.

The IRS did establish a safe harbor where rental properties can qualify for this deduction. If you have a rental property or properties you have to do the following:

  1. Keep separate books and bank accounts for your rental property
  2. Spend at least 250 hours every year working on the property (that is almost 5 hours per week!)
  3. Issue 1099 forms if you paid an individual more than $600

Interestingly enough if you have a triple-net lease, you automatically do not qualify for this deduction regardless if you meet the above safe harbor rules.

In order to take advantage of the safe harbor rules, you also must keep a contemporaneous log of the time you, your agent, or your independent contractors spent on your rental property to prove you spent at least 250 hours.

Time you spend in an investor capacity such as reviewing financial statements, obtaining financing or refinancing the property, buying the property and traveling to and from the property do not count toward your 250 hours.

The IRS just released additional rules and regulations on how to take this 20% business deduction and I am sure we will see even more come out in the next couple of months. SBS CPA Group is doing our best to keep on top of these changes and clarifications as they come out so we can properly take or not take this deduction for you, so stay tuned!

Karena Sylvester, CPA


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