7784 / What is the safe harbor that allows rental real estate businesses to claim the Section 199A deduction?

Only pass-through entities that qualify as a “trade or business” are entitled to claim the new 20 percent deduction for qualified business income under Section 199A. Many business owners engaged in rental real estate activities had questioned whether their businesses would qualify for the deduction. In response, the IRS released proposed Revenue Procedure 2019-07, finalized by Revenue Procedure 2019-38, which provides a safe harbor so that rental real estate businesses will qualify as “trades or businesses” and can claim the 199A deduction if they satisfy certain criteria. For purposes of the safe harbor, “rental real estate enterprise” is defined to include any interest in real property held to generate rental or lease income, and can be comprised of an interest in a single property or multiple properties.

To qualify under the safe harbor, the following requirements must be met:

(1) Separate books and records for each rental enterprise must be maintained,

(2) If the rental real estate enterprise has been in existence for less than four years, 250 or more hours of rental real estate services must be performed each year,