Author Topic: Rental property owners probably lose "Section 199A deduction"  (Read 1091 times)

SeattleCPA

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Rental property owners probably lose "Section 199A deduction"
« on: January 22, 2019, 08:09:43 PM »
If you haven't seen this and you have rentals, you may want to look at the rental safe harbor notice from IRS:

https://www.irs.gov/pub/irs-drop/n-19-07.pdf

FWIW, the CPAs I talk with--and me too--think this basically kills off the Section 199A deduction for rental owners with one or two properties...

sol

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #1 on: January 22, 2019, 10:02:29 PM »
If that document's guidance were the only way to qualify for the 20% pass through deduction, then I agree that seems prohibitively difficult for a normal landlord.  Mostly because it requires you keep detailed daily logs of your hours spent, and the hours have to exceed 250/year.  That's definitely doable if you're in the middle of a reno, but for a normal income-generating property I'd be pissed if I spent more than 250 hours per year collecting rents and doing maintenance.  That's more than six weeks of full time work.  Even when I have problem tenants who call me twice a month, like I do right now, I don't spend 250 hours per year.

Are there other ways?  That document specifically says that this is not the only way to qualify as a trade or business, but it doesn't give me any hints about what it would take to qualify by some means other than the safe harbor provision.

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #2 on: January 23, 2019, 08:09:49 AM »
So good questions... but one point of clarification: One needs to not only keep track of your hours (and track them contemporaneously starting in 2019). One also needs to track the hours of your vendors: repair guy, bookkeeper, kid who moves or is supposed to mow lawn and weed flower beds etc.

The "other ways" the proposed revenue procedure alludes to probably mean the "Section 162 trade or business" standard which I discussed in massive detail here: https://evergreensmallbusiness.com/section-199a-rental-property-trade-or-business-definition/

The practical problem with the approach described in that blog post--and approach which seemed and still seems to mesh with the regulations is it looks so different from the safe harbor in the proposed revenue procedure. To look at just the hours thing... Treasury and IRS say in safe harbor description that 250 hours sounds good.

But in other guidance like that described and discussed in the blog post, someone giving ten speeches over the year (so maybe ten hours of talking and twenty hours of preparation?) counts as a Section 162 trade or business. And someone giving blood 95 times over the course of a year (so maybe 100 hours?) counts.

I have represented taxpayers in audits related to things like "real estate professional" qualification... and truly truly I can't imagine a good outcome where someone plainly doesn't qualify for the safe harbor but purports to qualify under some lesser standard that seems to mesh with Section 162 standard.

Sorry.

P.S Sol? Good to be in a message thread discussing stuff with you again. :-)

tralfamadorian

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #3 on: January 23, 2019, 11:42:54 AM »
Thanks for the update @SeattleCPA ! It sounds like the 199A qualifications are very similar to the real estate professional qualifications. For simplicity's sake, should a real estate investor consider them one and the same?

dandarc

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #4 on: January 23, 2019, 11:54:49 AM »
This is mainly concerning if your only business income comes from rentals, yes?

Score yet one more in "just should have sold the house, stupid" if it will cost me this deduction on my much larger, not-at-all real estate related, schedule C income.

oldmannickels

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #5 on: January 23, 2019, 11:56:39 AM »
So good questions... but one point of clarification: One needs to not only keep track of your hours (and track them contemporaneously starting in 2019). One also needs to track the hours of your vendors: repair guy, bookkeeper, kid who moves or is supposed to mow lawn and weed flower beds etc.

The "other ways" the proposed revenue procedure alludes to probably mean the "Section 162 trade or business" standard which I discussed in massive detail here: https://evergreensmallbusiness.com/section-199a-rental-property-trade-or-business-definition/

The practical problem with the approach described in that blog post--and approach which seemed and still seems to mesh with the regulations is it looks so different from the safe harbor in the proposed revenue procedure. To look at just the hours thing... Treasury and IRS say in safe harbor description that 250 hours sounds good.

But in other guidance like that described and discussed in the blog post, someone giving ten speeches over the year (so maybe ten hours of talking and twenty hours of preparation?) counts as a Section 162 trade or business. And someone giving blood 95 times over the course of a year (so maybe 100 hours?) counts.

I have represented taxpayers in audits related to things like "real estate professional" qualification... and truly truly I can't imagine a good outcome where someone plainly doesn't qualify for the safe harbor but purports to qualify under some lesser standard that seems to mesh with Section 162 standard.

Sorry.

P.S Sol? Good to be in a message thread discussing stuff with you again. :-)

I don't know the real estate professional is pretty cut and dry with qualification. There's not a safe harbor there and there's no alternative measure to qualify like Sec 162.

If you think you qualify under Sec 162 and don't meet the safe harbor you should consider filing a 8275 and state the facts and circumstances under which you made the determination and file it with your forms.

sol

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #6 on: January 23, 2019, 12:13:51 PM »
I can't imagine a good outcome where someone plainly doesn't qualify for the safe harbor but purports to qualify under some lesser standard that seems to mesh with Section 162 standard.

This is kind of a weird situation though, right?  The new guidance on the safe harbor provision seem to contradict the previous guidance and set an unusually high bar for qualification. 

Usually a safe harbor provision is an easy-to-hit minimum designed to avoid burdensome reporting activities, like the quarterly underpayment safe harbor where they won't ding you as long as you pay as much as you did last year, regardless of what you owe this year.  That's just easier for everyone.  This particular safe harbor provision seems to be deliberately extra burdensome instead, which still kind of makes sense.  It's like they're saying "well you're definitely safe if you do ALL of this stuff" but maybe that means there are other ways to still be safe that are not quite so hard to achieve?

Or, maybe this is just a retroactive downgrade of the TCJA to raise revenues by denying this particular corporate tax break to small time real estate investors, while preserving it for big firms that make political donations.

Quote
P.S Sol? Good to be in a message thread discussing stuff with you again. :-)

I've been spending too much time in the politics threads, bickering about immigration and obstruction and collusion, and less time in threads about the financial side of retirement.  Now that I'm retired, the financial side mostly takes care of itself.

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #7 on: January 23, 2019, 01:10:34 PM »
Thanks for the update @SeattleCPA ! It sounds like the 199A qualifications are very similar to the real estate professional qualifications. For simplicity's sake, should a real estate investor consider them one and the same?

The two things differ. That link to the proposed revenue procedure is pretty readable and explains...

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #8 on: January 23, 2019, 01:11:48 PM »
This is mainly concerning if your only business income comes from rentals, yes?

Score yet one more in "just should have sold the house, stupid" if it will cost me this deduction on my much larger, not-at-all real estate related, schedule C income.

Not sure I understand. But I think the right way to process this is, "oh gosh, darn it... I wanted to not pay income taxes on the last 20% of my rental income... but I don't get that loophole..."

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #9 on: January 23, 2019, 01:17:39 PM »
This is kind of a weird situation though, right?  The new guidance on the safe harbor provision seem to contradict the previous guidance and set an unusually high bar for qualification.

Weird? Yes. And a contradiction of previous guidance? Well, with exception of the draft pub 535 form instructions--which also tighten the rules as compared to previous guidance--yes, it seems to contradict previous guidance.



Usually a safe harbor provision is an easy-to-hit minimum designed to avoid burdensome reporting activities, like the quarterly underpayment safe harbor where they won't ding you as long as you pay as much as you did last year, regardless of what you owe this year.  That's just easier for everyone.  This particular safe harbor provision seems to be deliberately extra burdensome instead, which still kind of makes sense.  It's like they're saying "well you're definitely safe if you do ALL of this stuff" but maybe that means there are other ways to still be safe that are not quite so hard to achieve?

If it was only the safe harbor we were talking about, I think I'd agree with this. And for the record, I wish above were case. But they're adding to the Section 162 standard by saying taxpayer's rental activities need to meet Sec 162 standard and also also show extensiveness and reflect considerable activity.

I guess the other thing is, why 250 hours? Why not 50 hours? Or 100 hours?

Or, maybe this is just a retroactive downgrade of the TCJA to raise revenues by denying this particular corporate tax break to small time real estate investors, while preserving it for big firms that make political donations.

I feel like safe harbor does reflect a downgrade.


I've been spending too much time in the politics threads, bickering about immigration and obstruction and collusion, and less time in threads about the financial side of retirement.  Now that I'm retired, the financial side mostly takes care of itself.

:-)

Another Reader

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #10 on: January 23, 2019, 01:38:41 PM »
Guess I'm going to have to buy something new that will allow me to "lose" more money through depreciation instead...

I own a lot of rentals, but use property management.  I qualify as an active participant, but only hire SOME of the work out myself out of state.  I'm sure I would be challenged, but will run it by the CPA when I schlep the paperwork up there.
« Last Edit: January 23, 2019, 01:42:28 PM by Another Reader »

dandarc

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #11 on: January 23, 2019, 01:52:17 PM »
This is mainly concerning if your only business income comes from rentals, yes?

Score yet one more in "just should have sold the house, stupid" if it will cost me this deduction on my much larger, not-at-all real estate related, schedule C income.

Not sure I understand. But I think the right way to process this is, "oh gosh, darn it... I wanted to not pay income taxes on the last 20% of my rental income... but I don't get that loophole..."
Thanks for clarifying. In any event, since in my case, taxable income is quite a bit less than qualified business income, I believe there's no impact at all to the deduction from a few thousand dollars of net rental income.

I swear I saw another response a few minutes ago with this same "wait - I have a rental, so I lose the 199A deductions!?" thought. Maybe it was another thread.

DMAC

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #12 on: January 23, 2019, 03:16:34 PM »
I own a vacation rental property and have a cleaning crew that comes in and cleans after each reservation. The cleaning takes approximately 4 hours.  I average about 40 reservations per year.  Does that 160 hrs of cleaning time count toward the 250 hours of  "rental services"? The guidance states "the services also may be performed by employees, agents, or independent contractors of the owner" so I'm assuming those hours count, am I correct?

Also, this property is about 4 hours from where I reside. I drive up there about once per month to check on my belongings and perform some maintenance. Does the drive time up there count toward rentals service hours? I appreciate anyone's input.

I also own a long term rental property that I have a management company do everything for. I do not plan on trying to qualify that as a trade or business, will that complicate things?

sol

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #13 on: January 23, 2019, 03:48:11 PM »
Does that 160 hrs of cleaning time count toward the 250 hours of  "rental services"?
..
Does the drive time up there count toward rentals service hours?

My reading of that document is that your cleaning crew counts, and your driving time does not. 

Services performed by anyone you hire seem to contribute to the total, as long as you log the who what when and where on a day by day basis.  Driving to and from your property is specifically disallowed.

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #14 on: January 23, 2019, 05:22:03 PM »
Guess I'm going to have to buy something new that will allow me to "lose" more money through depreciation instead...

I own a lot of rentals, but use property management.  I qualify as an active participant, but only hire SOME of the work out myself out of state.  I'm sure I would be challenged, but will run it by the CPA when I schlep the paperwork up there.

So this important point... the 250 hours doesn't just count your time. It also counts your property manager's time, the repair guy's time, etc., etc.

Bottomline? You are probably okay.

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #15 on: January 23, 2019, 05:22:31 PM »
Does that 160 hrs of cleaning time count toward the 250 hours of  "rental services"?
..
Does the drive time up there count toward rentals service hours?

My reading of that document is that your cleaning crew counts, and your driving time does not. 

Services performed by anyone you hire seem to contribute to the total, as long as you log the who what when and where on a day by day basis.  Driving to and from your property is specifically disallowed.

+1

Bobberth

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #16 on: January 24, 2019, 02:49:25 PM »
Page 5 of that Notice, under Background says: "...Congress enacted section 199A to provide 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, as well as a deduction of up to 20 percent of aggregate real estate investment trust (REIT) dividends and qualified publicly traded partnership income...."

So owning REITs or LPs will qualify for the deduction but only working 240 hours in rental real estate won't? That seems the exact opposite of what reason would suggest.



DMAC

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #17 on: January 24, 2019, 04:13:38 PM »

Quote

My reading of that document is that your cleaning crew counts, and your driving time does not. 

Services performed by anyone you hire seem to contribute to the total, as long as you log the who what when and where on a day by day basis.  Driving to and from your property is specifically disallowed.
Quote
+1

Great, thanks for the clarification. So as a sole proprietor, can both my long term rental and vacation rental's combined income qualify for the deduction? Or is each rental treated separately when qualifying for the deduction?

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #18 on: January 24, 2019, 04:54:36 PM »
Page 5 of that Notice, under Background says: "...Congress enacted section 199A to provide 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, as well as a deduction of up to 20 percent of aggregate real estate investment trust (REIT) dividends and qualified publicly traded partnership income...."

So owning REITs or LPs will qualify for the deduction but only working 240 hours in rental real estate won't? That seems the exact opposite of what reason would suggest.

Bobberth, I agree with you. The tightened rules don't exactly seem to mesh with the earlier promises from the legislators.

BTW, you could decide to not use the safe harbor and just "go for it." But I think and the other CPAs I'm talking to think that may be risky.

SeattleCPA

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Re: Rental property owners probably lose "Section 199A deduction"
« Reply #19 on: January 24, 2019, 04:57:59 PM »

Quote

My reading of that document is that your cleaning crew counts, and your driving time does not. 

Services performed by anyone you hire seem to contribute to the total, as long as you log the who what when and where on a day by day basis.  Driving to and from your property is specifically disallowed.
Quote
+1

Great, thanks for the clarification. So as a sole proprietor, can both my long term rental and vacation rental's combined income qualify for the deduction? Or is each rental treated separately when qualifying for the deduction?

You can look at rental properties individually... or you can combine them into groups of similar properties... like all your residential rentals together.

BTW, you can't use safe harbor for mixed use dwellings (so called Section 280A property). I.e., a florida rental you mostly rent but also use a little bit.