Section 199A Deduction for Rental Real Estate: Understanding the IRS Safe Harbor Rules
- Jul 20
- 2 min read
IRS Safe Harbor Guidance for Rental Real Estate and the Section 199A Deduction
The IRS has issued additional guidance on Section 199A, which allows eligible business owners to deduct up to 20% of their qualified business income (QBI)from certain pass-through businesses. This deduction can provide substantial tax savings for qualifying taxpayers.
For owners of rental real estate, one of the key questions is whether the rental activity rises to the level of a Section 162 trade or business, making it eligible for the deduction.
IRS Safe Harbor Requirements
To provide greater clarity, the IRS established a safe harbor in Revenue Procedure 2019-38 (which supersedes earlier guidance). Under this safe harbor, a rental real estate enterprise is generally treated as a trade or business if all of the following requirements are met:
Separate books and records are maintained for each rental real estate enterprise (or for multiple properties treated as a single enterprise, if applicable).
At least 250 hours of qualifying rental services are performed each year for the rental enterprise. (Special rules may apply in certain circumstances.)
The taxpayer maintains contemporaneous records documenting:
The number of hours worked
A description of the services performed
The dates the services were performed
Who performed the services
What Counts as Rental Services?
The required rental services do not have to be performed by the property owner. Employees, agents, or independent contractors may also perform these services.
Examples of qualifying rental services include:
Advertising available rental properties
Negotiating and executing leases
Reviewing prospective tenant applications
Collecting rent
Daily operation, maintenance, and repair of rental property
Property management activities
Purchasing materials and supplies
Supervising employees and independent contractors
Activities That Do Not Qualify
Certain activities are specifically excluded from the definition of rental services for purposes of the safe harbor, including:
Financial or investment management activities, such as arranging financing
Acquiring or purchasing property
Reviewing financial statements or operating reports
Planning, managing, or overseeing long-term capital improvements
Travel time to and from the rental property
Why Proper Documentation Matters
Millions of taxpayers own rental real estate either directly or through pass-through entities such as S corporations, partnerships, or LLCs. Many of these owners may qualify for the Section 199A deduction if their rental activity meets the applicable requirements.
Maintaining thorough and accurate records of rental services throughout the year is essential to demonstrating eligibility for the safe harbor and supporting your deduction in the event of an IRS inquiry.
We're Here to Help
Determining whether your rental real estate activity qualifies as a Section 162 trade or business can be complex. If you believe your rental enterprise may be eligible for the Section 199A deduction, now is the time to establish strong record-keeping practices.
If you have questions about the Section 199A deduction or would like assistance evaluating your eligibility, contact our office. We'll be happy to help you maximize your available tax benefits while ensuring compliance with IRS requirements.
Katie McClintock, CPA, CEO
Direct : 719-373-1849
Office : 719-466-2828
Email: katie@mcclintocktaxcpa.com
Website : www.mcclintocktaxcpa.com
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