Beginning in Tax year 2018 the Tax Cuts and Jobs Act (TCJA) added a new deduction from business income referred to as the Qualified Business Income Deduction or Section 199A Deduction. In 2019, updates were made to this deduction to allow a safe harbor for rental income to be eligible for the 20% deduction. This deduction is subject to limitation and eligibility requirements. The Section 199A deduction is scheduled to automatically expire in December 2025.
In order to be considered eligible for this deduction under the safe harbor you must meet the following requirements:
- Each rental property must have separately maintained books and records to reflect the expenses incurred on that property.
- Perform a minimum of 250 hours of real estate related work annually, if you have been involved in real estate enterprises less than 4 years. If you have been involved in real estate enterprises longer than 4 years you must perform a minimum of 250 hours in last 3 out of the last 5 years.
- You maintain coexisting records reporting the number of hours you were performing real estate related work, descriptive information about the kind of work you were performing, dates that you performed these activities and who carried out these tasks.
- Attach a statement to your return indicating the safe harbor is being elected.
Real Estate related work can include:
- Arranging leases
- Collecting Rent
- Maintaining the property
- Authenticating and authorizing rental applications
Real Estate related work does not include:
- Purchasing property
- Investment planning
- Time spent traveling to the property
- Finance arrangement
Not all property types are eligible for the safe harbor deduction, these include:
- A property that is used, in part, as a specified service business
- A property you rent to yourself
- A rented property in which the tenant is required to pay taxes, utilities, maintenance and insurance on the property.
- A rented property that is used for personal use at any time during the year
If you qualify for this deduction, you can make this election within the program, by going to:
- Federal Section
- Profit or Loss from Rentals and Royalties
- Qualified Business Income Deduction
You can read more about these eligibility requirements on the IRS website by clicking here.