The Ballad Of 199A: The Expanded Safe Harbor For Landlords
Just when we finished our Section 199A book, and started to promote,
The IRS issued Revenue Procedure 2019-38, to let a few more landlords float.
Under this new part of the Section 199A Rules,
Planners are given a couple of new tools.
To briefly review the harbor’s dimensions,
Let’s remember that landlords may deduct 20% of their taxable income under Section 199A to afford to put more money in their pensions.
To qualify for the deduction, there must be a trade or business going,
Giving tenants the use of property as its function, and the landlord can do the mowing.
And a trade or business has to be reasonably active,
With the owner risking capital for the sake of potential income that is attractive.
There are other requirements beyond this poem,
You can click here if you want to know ‘em.
It is important to note that not qualifying under the Safe Harbor does not mean that you are not an active business or trade.
But IRS auditors will be more likely to let you pass along if you meet the Safe Harbor, so that you can be less afraid.
But almost none of those requirements apply to a landlord, who has taxable income below certain levels if married, filing jointly, together.
With taxable income under $315,000 for 2018, and $321,400 for 2019, regardless of weather.
If single or filing separate and not joint.
$157,500 for 2018, and $160,725 for 2019, is your threshold point.
If you are over the threshold then wages and “qualified property,”
May still give you the full deduction, which can be as good as getting hotels on Boardwalk and Park Place in Monopoly.
But going back to the Safe Harbor,
Revenue Procedure 2019-38 that was issued in September of this year by the IRS announced this with much splendor.
The most prominent requirement is that 250 hours,
Must be spent doing work relating to the rental activities, doing everything that the IRS lists as being legitimate use of landlord time, which might include gardening so that the tenant has the enjoyment of nice flowers.
The list of items that hours can be counted are as follows:
- Collecting rent;
- Daily operation, management and repair;
- Management of the real estate;
- The purchase of materials and supplies; and
- Supervision of employees and independent contractors.
Yes, there must be 250 hours or more of the above activities to meet the Safe Harbor and stay out of the gallows.
The following activities are not included in time spent.
- Doing due diligence on prospective properties and purchasing properties;
- Studying and reviewing financial statements or operational reports;
- Traveling to and from the real estate;
- Or other financial or investment management activities; and
- Improving property under § 1.263(a)-3(d) (Amounts Paid to improve tangible property)
It seems unfair that landlords have to do these things and that they are part of being a trade or business, but they can’t be counted, so we must relent.
In the Notice, the 250 hours had to be counted contemporaneously.
Including hours spent by the owners, contractors, and others who would find a landlord telling them to keep their time exactly to be insaneously.
The Revenue Procedure loosens the rope,
By indicating that the time spent by contractors and agents need not be contemporaneously measured, but can instead be estimated so a fair amount of time can be what the taxpayer will denote.
CPAs and lawyers rejoice,
This new rule may give us a voice.
If the owners are John and Mary, and they have to keep contemporaneous time, and may get wary.
So, LLCs taxed as partnerships may become the owners of choice
For people who do not want to have to keep individual time,
There is a strategy sublime,
They can work as contractors for the partnership, you see
or a separate company they set up may do so for thee.
Another rule change involving the 250 hour requirement,
May allow some landlords to stay out of retirement.
If you have owned the property for four years,
And put in 250 hours for three of the four, then there will be no tears.
And you could even go for a fifth,
If 3 out of 5 years you spend 250 hours you are good,
Regardless of the properties height or width.
The next new change of rule,
Is not entirely cool.
Separate buildings and apartments owned by the same entity
Can be combined as one, and recognized for synergy.
For example, if you have four buildings and four separate tenants,
That can be considered as one enterprise for the 250 hour test, because you’re paying a common penitence.
But if some buildings are commercial and some are residential
Then you have to separate them by aggregating residential and separately aggregating commercial, which the IRS apparently views as being essential.
The one exception now allowed by the Revenue Procedure,
Is that if you have one building that has both commercial and residential integrated together then that can be one testing entity that you can count for the 250 hour test at your leisure.
But if you have separate commercial and separate residential and then a mixed use arrangement,
Then you have to regard them as three separate groupings, which is surely derangement.
For all these rules we thank the IRS,
They really are the best.
The new Revenue Procedure certainly helps the situation.
And remember that you cannot use your rental property personally whatsoever, and qualify for the Safe Harbor,
Not even for a brief vacation
Please do not rely soley upon this poem.
It’s better to have a responsible tax advisor, and get to know him (or her).
And consider converting your rental to an Airbnb.
That is certainly more active, although it will not make the neighbors jolly.
Please let us know if you have any questions or comments.
And thanks for putting up with the rhyming, with so much tolerance.
Our recently updated book regarding Section 199A is titled: The Section 199A (and 1202) Handbook. It is now available on Amazon.