Notice 2019-07 Creates a Safe Harbor for Rental Income

Notice 2019-07 Creates a Safe Harbor for Rental Income

When the Tax Cuts and Jobs Act signed into law in 2017, the act brought changes to both personal and business income taxes. We developed a comprehensive guide on the TCJA and offered more details on the Qualified Business Income Deduction (QBDI) in 2018, but questions still remain on some of the finer details, particularly with rental properties. In a competitive rental market like the Madison area, you’re likely wondering if your rental property income qualifies for the coveted 20% tax deduction. The IRS recently clarified and issued some guidance on whether income from real estate rental activities was “Qualified Business Income” (QBI). Notice 2019-07, a new proposed revenue procedure, provides a safe harbor under which rental real estate will be treated as a trade or business solely for the purposes of Section 199A. This proposed revenue procedure would apply to tax years ending after December 31, 2017. The new notice, however, does not apply to self-rental situations, where a business pays rent to a related party entity which is owned by the same business owner(s). We’ll outline some of the core details from the IRS notice and how to qualify, below. [Related: A Comprehensive Guide to the Top 8 Provisions of the Tax Cuts and Jobs Act]   Qualifying for the Safe Harbor Taxpayers looking to utilize Section 199A’s deduction must hold the rental property directly or through a disregarded entity. They must also treat each rental property as a single activity or elect to treat all similar rentals as a single activity. The choice is either a “one or all,” meaning you must combine all similar rentals,...