As you may be aware, the IRS recently provided a safe harbor to determine when a rental real estate enterprise will qualify as a trade or business, and thus able to receive the 20% Qualified Business Income (QBI) tax deduction. This IRS notice states that a rental enterprise will be treated as a qualifying trade or business if the following three requirements are met:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
- 250 or more hours of rental services are performed with respect to the enterprise in either three of the most recent five tax years, or all tax years if the enterprise is under five years old; and
- The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. This requirement does not apply to taxable years beginning prior to January 1, 2019.
The active requirement of 250 hours is roughly one hour per day for every Monday through Friday business day of the year. That's not too tough of a hurdle, particularly since specific rental services include (a) advertising to rent or lease the real estate; (b) negotiating and executing leases; (c) verifying information contained in prospective tenant applications; (d) collection of rent; (e) daily operation, maintenance, and repair of the property; (f) management of the real estate; (g) purchase of materials; and (h) supervision of employees and independent contractors.
Importantly, these rental services don't have to be performed solely by owners—time spent by employees, agents, and/or independent contractors counts toward the 250 hours.
Even better, the requirement to maintain contemporaneous records does not apply to the 2018 tax year. Great news right?
Yes, it is—for 2018. But right now, we are well into 2019—and contemporaneous records are required. Contemporaneous means real-time, detailed documentation of what services are being performed as they are happening—not a hastily produced list put together months or years later when the IRS comes knocking.
So, is your rental services record current? If not, make it a priority today, so that the 20% QBI tax deduction your rental real estate enjoys in 2018 will still be available for 2019 and beyond.
If you would like help creating your customized rental services log, or have any questions at all, please leave comment below, or contact me directly. I am more than happy to help!