How Rental Property Owners Can Qualify for the 199A Deduction
By Kevin Kalal, CPA
The 199A deduction has arguably been one of most talked about tax breaks included in the Tax Cuts and Jobs Act. Taxpayers who qualify for it can claim up to a 20% deduction on qualified business income (QBI) for businesses operated directly by the taxpayer or through a pass-through entity. For rental property owners, this can be a particularly valuable benefit.
Yes, you read that correctly. As a rental property owner, it’s possible you could qualify for the 199A deduction—if you meet certain requirements. Your ability to qualify also depends on the facts and circumstances of your situation.
Here are a few of the requirements rental property owners must meet in order to qualify.
1. Maintain separate books and records for each real estate enterprise.
This requirement is pretty straightforward. It’s also one more reason to stay organized.
2. Provide over 250 or more hours of “rental services” by or for the real estate enterprise each year.
Thankfully, this requirement allows rental services to be performed by anyone (e.g., a property management company)—you’re not on the hook for completing 250 hours of work. Here are services that qualify as “rental services”:
• Advertising for rent or lease
• Negotiating and executing leases
• Verifying tenant applications
• Collecting rent
• Operating, maintaining, and repairing property on a daily basis
• Managing the real estate
• Purchasing materials
• Supervising employees and independent contractors
3. Document your rental services.
This time-tracking requirement is new for 2019; don’t let it catch you off guard. You must track and record the time spent, whether by you or an employee or service provider, providing the aforementioned rental services. Your time-tracking logs should document the hours spent on each rental service, a description of the service, dates the service was performed, and who performed it.
4. Avoid the triple-net lease trap.
Renting residential property under a triple-net lease, which is a lease that requires tenants to cover real estate taxes, building insurance, and maintenance in addition to usual expenses such as rent and utilities, will automatically disqualify you from the 199A deduction. To avoid this trap, review your leases to ensure none are set up as triple-net. If you have a triple-net lease, consider re-doing the lease to state that you’ll pay for some expenses related to the property, such as real estate taxes or insurance. In many cases, the tax savings brought about by the 199A deduction will be more advantageous than requiring tenants sign a triple-net lease.
What if you don’t meet the 199A requirements?
As I mentioned, your ability to qualify for the 199A deduction also depends on the facts and circumstances of your situation. So, even if you don’t meet the requirements listed above, it’s possible you could still qualify. It’s also important to note that self-rentals (i.e., you, as the owner, rent the property to your business) could also qualify for the 199A deduction, albeit under different rules.
Consider taking action now if you haven’t already to make sure you qualify for this substantial benefit for tax year 2019. There are many provisions in the new tax law, in addition to the requirements I’ve listed here, that need to be considered when applying, so be sure to consult with your CPA. And if you aren’t currently meeting these requirements, don’t worry—there’s still time to act.
Don’t leave your 199A qualification status in limbo.
If you have questions about your ability to qualify for the 199A deduction, please give us a call. We can guide you through implementing the appropriate record-keeping and time-tracking systems, and help you provide the right documentation to support the QBI deduction on your tax return.