IRS Clarifies Deductions for Real Estate Investors

Posted on April 24, 2019

The IRS has finally weighed in on whether investors’ real estate rental income rises to the level of qualified business or trade income (QBI) that is eligible for a new 20 percent deduction under the new tax law. For tax years beginning in 2018, rental real estate enterprises structured as relevant pass-through entities (RPEs), such as S corporations, LLCs, partnerships, sole proprietorships, trusts or estates, may qualify to write off up to 20 percent of income they generate from rental activities they perform at least 250 hours of rental services per year per enterprise. Moreover, the IRS requires these taxpayers to maintain contemporaneous records of dates and hours of services as well as separate books to reflect the income and expenses of each of their rental real estate enterprises.

Specifically excluded from the QBI eligibility is real estate that taxpayers use as a residence for any portion of the year (such as a vacation home) as well as triple-net-lease (NNN) property, for which tenants are responsible for paying along with their rents property taxes, insurance, utilities and maintenance costs. This last point may require further clarification from the IRS since it could be argued that NNN still constitutes a valid trade or business.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.