Tax Insights

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Tax reform for business real estate: self rentals

real estate, tax reform, business, self rentalsUnder the new tax reform passed in late 2017, Internal Revenue Code Section 199A offers a 20% tax deduction to certain businesses that have qualified business income (QBI). Section 199A was enacted to provide a deduction for pass-through entities such as sole proprietors, trusts, estates, partnerships and S Corporations. Proposed regulations have now been released to provide guidance on how this deduction could benefit different types of businesses. One area that has raised questions is whether real estate lessors could take the deduction.

Real estate rental income may be considered QBI if it is income under a trade or business. The proposed regulations do not offer a clear distinction as to what makes a real estate rental a trade or business. In prior regulations, the IRS has described a trade or business as one in which the taxpayer is readily involved with and entered with the main goal of making a profit. Hopefully, we will see better guidance on this determination in the future.

Don’t miss: Section 199A deduction aggregation rules

Although the proposed regulations did not offer a concise definition of a trade or business for real estate purposes, they did offer some guidance on self-rentals. A self-rental is when a business rents real estate from an entity with common control. Common control exists when the same person(s) own 50% or more of both businesses. If a trade or business rents real estate from an entity that has common ownership. and the real estate is used by the operating business, the rental income may be considered QBI. The proposed regulations state:

It is not uncommon that for legal or other non-tax reasons taxpayers may segregate rental property from operating businesses. This rule allows taxpayers to aggregate their trades or businesses with the associated rental or intangible property under proposed Section 1.199A-4 if all the requirements of proposed Section 1.199A-4 are met. In addition, this rule may prevent taxpayers from improperly allocating losses or deductions away from trades or businesses that generate income that is eligible for a section 199A deduction.

Please consult your Henry+Horne qualified tax professional for questions or assistance. This information is general and should not be relied upon.

Jill A. Helm, CPA