The IRS just released new instructions clarifying part of the 2018 Tax Cuts and Jobs Act (TCJA) and providing a safe harbor for real estate rentals to qualify for a special 20% deduction (Section 199A) and therefore a lower tax under the new tax law. In order to qualify for this deduction, the lessor must be treated as an “active trade or business.”
IRS Notice 2019-7 states that solely for purposes of 199A, rental real estate will be treated as a trade or business if the following requirements are met:
- Separate books and records are maintained to reflect income and expenses for each rental.
- 250 or more hours of rental services are performed per year. Rental services include advertising to rent, negotiating and executing leases, verifying information, collecting rent, operating and maintenance of the property, management, purchase of materials, and supervision of employees or independent contractors. It does NOT include arranging financing, procuring property, studying or reviewing financial statements, reports on operations, planning or constructing long-term capital improvements, or hours spent traveling to or from the real estate. The 250 hours may be performed by the owner or someone hired by the owner.
- The taxpayer must maintain contemporaneous records to include time logs documenting hours of all services performed, a description of the services performed, dates of the services performed, and who performed the services. For 2018 only, the IRS has allowed that owners need not be held to the “contemporaneous record” standard if they can now document the time spent during the year. For 2019, it will be critical to keep accurate contemporaneous records of time spent on the specific rental property – meaning a weekly log of time spent on each property.
We also recommend that the lessor prepare 1099MISCs for any services performed by contractors.
It is very important to note that the safe harbor rules above do not apply to any properties with a triple net lease, even if they meet the 250 hour requirement.
This notice is good news for most of our clients with rental real estate enterprises, as it clarifies how and when to qualify for the 20% deduction for real estate rentals.
Please feel free to contact us if you have any questions.
TAX TIPS FOR THE SELF-EMPLOYED
- Establish a Simplified Employee Pension (SEP) Plan by the due date of your 2018 return, including extensions. The contribution to the plan must be made by that due date. For 2018, the maximum allowable contribution to a SEP an employee can make independently of an employer is $5,500 ($6,500 if a catch-up contribution). However, the maximum combined deduction for an active participant’s elective deferrals and other SEP contributions is $55,000 for 2018.
2018 FEDERAL INCOME TAX RATES
|Tax Rate||Joint/Surviving Spouse||Single||Head of
|Married Filing Separately||Estate & Trusts|
|10%||$0 – $19,050||$0 – $9,525||$0 – $13,600||$0 – $9,525||$0 – $2,550|
|12%||$19,050 – $77,400||$9,525 – $38,700||$13,600 – $51,800||$9,525 – $38,700||–|
|22%||$77,400 – $165,000||$38,700 – $82,500||$51,800 – $82,500||$38,700 – $82,500||–|
|24%||$165,000 – $315,000||$82,500 – $157,500||$82,500 – $157,500||$82,500 – $157,500||$2,550 – $9,150|
|32%||$315,000 – $400,000||$157,500 – $200,000||$157,500 – $200,000||$157,500 – $200,000||–|
|35%||$400,000 – $600,000||$200,000 – $500,000||$200,000 – $500,000||$200,000 – $300,000||$9,150 – $12,500|
|37%||Over $600,000||Over $500,000||Over $500,000||Over $300,000||Over $12,500|
Like an annual physical examination is important for maintaining good health, an annual financial examination that includes year-end tax planning can enhance your financial well-being. We are here to assist you to achieve your tax and financial objectives. Contact us today.
On December 13, 2017, House and Senate Republicans reached a compromise on tax reform legislation, the “Tax Cuts and Jobs Act.” The compromise bill reportedly includes agreements on corporate and individual tax rates, the treatment of pass-through income, the estate tax, and itemized deductions such as those for mortgage interest and state and local taxes, among other areas. The text of the bill is expected to be released on Friday, with votes in the full House and Senate next week.
These are among the changes reportedly included in the compromise legislation… While bill language is not yet available, these agreed-to provisions are the first provisions reportedly out of the Conference Committee. The corporate tax rate would be set at 21% for tax years beginning in 2018, as opposed to the current rate of 35% and the previously proposed cut to 20%.
- The highest individual tax rate would be reduced from 39.6% to 37%. The Senate legislation originally called for a 38.5% top rate.
- Individuals receiving pass-through income from entities such as partnerships and S corporations would be able to deduct 20% of this income from their taxable income, a lower rate than the 23% proposed in the Senate plan. The House bill would have capped the rate at which this income was taxed at 25%. This deduction would be subject to various limitations and applicable to only certain income sources.
- The estate tax would remain in place; however the lifetime exemption is expected to increase to roughly $11 million in 2018 (and be indexed for inflation). Both the House and Senate had proposed an increased exemption amount. The House had further proposed the future repeal of the estate tax.
- The alternative minimum tax for corporations would be repealed, matching the House bill. The individual AMT would remain, but the threshold amounts would increase.
- Mortgage interest would be deductible based on indebtedness up to $750,000, which is the midpoint between the House proposal of $500,000 and the Senate’s plan to keep the existing $1 million cap.
If you have any questions regarding the new tax legislation proposal, please contact us at 703.652.1473 or email us at email@example.com
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