New Treasury Reg. Impact Real Estate Investors

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Trump Tax Plan Update for Primary Residence Rentals

If you have a gain on your real estate endeavors, you may qualify for  the new Section 199A, 20% income deduction.

The uncertainty comes about because you need “qualified business income” aka QBI. QBI for businesses is pretty straightforward. It’s the income from a pass-through entity or a Schedule C Sole Proprietorship.

In the case of real estate income, you first need to determine if it’s a business or a passive  investment. A business income, in the case of a primary residence would occur when you rent your home out for short stays, averaging one week or less. In other words, if you’re using AirBnB or a similar service to turn your home into a vacation rental. That’s a business.

If you have a passive investment that has income after all deductions, then you may qualify for the 20% income deduction of that income. In order to receive that, you must have:

  • Separate accounting for the property. You can’t mix it with your personal or other property accounting.
  • At least 250 hours of “activity” for the real estate enterprise group. The “enterprise group” is a new term with the Trump Tax Plan and the subsequent Treasury Regulations that were released in 2019 regarding the plan. You are required to group your passive investments into “groups”, primarily separating residential rentals from commercial ones. Each group is required to have 250 hours of activity, but this is not the same activity that is counted for real estate professional status, active property participation (required to write off losses) or material property participation (required to write off losses when your income is over a certain threshold.) In this case, others can fulfill this activity. For example, landscapers or janitorial staff hours can be counted.
  • A complete time log showing who performed the work, when (date and time) and what exactly they did. This must substantiate the >250-hour requirement.

However, there is one more issue for your primary home. You cannot claim QBI for the 20% income deduction if your rent out your house for long term stays if you lived in the house at any time during the tax year.

Remember, though, if you have a rental business (short term vacation stay rentals), you automatically have QBI and will get the deduction.

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