TAX ALERT: Section 199A Safe Harbor Finalized for Rental Real Estate

When assessing whether rental real estate activities qualify for the new 20% section 199A deduction that came about under the Tax Cuts and Jobs Act, it is vital to understand whether the rental enterprise rises to the level of a trade or business.  The IRS has just released a revenue procedure (Rev. Proc. 2019-38) clarifying several aspects of its previous guidance.

Key understandings from the latest safe harbor guidance are:


  • At least 250 hours of rental services must have been performed annually in any three of the five preceding tax years. For enterprises that have been in existence less than four years, the hour requirement must be satisfied in the tax year under consideration.


  • Mixed-use property may be treated as a single rental real estate enterprise or may be bifurcated into separate residential and commercial interests. Mixed-use property treated as a single rental real estate enterprise cannot be considered as part of the same enterprise as other residential, commercial, or mixed-use property


  • Each rental real estate enterprise must maintain separate books and records. If an enterprise consists of more than one property, this requirement may be satisfied if books and records are maintained for each property and are subsequently consolidated.


  • For years beginning after December 31, 2019, the enterprise must maintain concurrent records documenting the hours, description and dates of all services performed, as well as who performed the services.


  • A taxpayer must attach a statement to the return that describes all rental real estate properties included in each rental real estate enterprise for each taxable year in which the taxpayer relies on the safe harbor. The taxpayer no longer needs to sign the statement confirming that all the safe harbor requirements were met.


Other items in the revenue procedure are largely unchanged from the prior guidance.  If you are a taxpayer with rental real estate, or holding interests in a rental real estate enterprise, reach out to a Sax advisor to determine whether your activities qualify as trades or businesses for purposes of section 199A.

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