Qualified Business Income Safe Harbor for Rentals Question

Question

Hello,

I own 8 rental properties of which 7 are residential and 1 is commercial. Some of the properties are held under individual LLC's and some are held directly under my name. They are all managed by a property management company who maintains income/expense records.

I am trying to determine if these properties as a whole ( except the commercial building) would qualify for the Qualified Business Income Safe Harbor. If I understand correctly, the commercial property would not qualify as it has a triple net lease, so I believe it would be just the 7 residential rentals that might qualify.

I would not have spent over 250 hours of rental services myself but my property management company probably would have across all 7 of them and if I understand correctly their time is allowed to count towards the 250 hour minimum

I also think the only way these properties would qualify for the Qualified Business Income Safe Harbor is if they were in this "enterprise" setup so the 250 hour requirement was spread across all of the properties. Does enterprise refer to an actual business structure, so say for example they all had to be held under one LLC or something, or is it just referring to enterprise in the sense that my rentals are being combined for tax purposes?

Thank you!

Mike9241 · Answer

IRS Notice 2019-07 updated by REV PROC 2019-38 establishes a new safe harbor for rental real estate.

So yes you can group all or none of the residential rentals. No grouping would require that for safe harbor purposes each property would have to meet the 250 hour and other safe harbor rules.

This safe harbor is available for taxpayers who seek to claim the section 199A deduction with respect to a "rental real estate enterprise." Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant passthrough entity (RPE) relying on this revenue procedure must hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member.

The following requirements must be met by taxpayers or RPEs to qualify for this safe harbor:

Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
The taxpayer attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.

rental real estate enterprise (“RREE”).

Tax Return Statement

The safe harbor cannot be utilized unless the taxpayer attaches a statement to its tax return. That must include certain info

a description (including the address and category (commercial, residential, mixed-use)) of all rental real estate properties that are included in each RREE (see below for grouping);
a description (including the address and rental category) of rental real estate properties acquired and disposed of during the taxable year; and
a representation that the requirements of the safe harbor have been satisfied.

Aggregating Separate Properties

As noted, the safe harbor contains a grouping rule. Generally, a taxpayer may only aggregate “similar” properties. For these purposes, commercial and residential properties are not treated as similar

Once a taxpayer treats interests in commercial properties or residential properties as a single RREE under the safe harbor, the taxpayer must continue to treat interests in all similar properties, including newly acquired properties, as a single RREE to the extent that the taxpayer continues to rely on the safe harbor.

However, a taxpayer that chooses to treat its interest in each residential or commercial property as a separate RREE may choose to treat its interests in all similar commercial or all similar residential properties as a single RREE in a future year.