Rental Property Section 199A deduction (QBID)

[Marianne]

I have several clients that own rental property that's reported on Schedule E.  They have not filed form 1099-misc's in previous years and I've checked the box that they aren't required to file 1099-Misc's with the mindset that they are not atrade or  business.  Now I'm wondering if they can take the section 199A (QBID) if the reasoning for them not filing 1099-misc's is because they aren't a trade or business.  I was at a tax seminar in December and the instructor said the regulations for being a business for the 1099-misc filing requirements is a different code section then the "being a business" for section 199A deduction.  I was at a webinar where the instructor said you couldn't take the deduction if that was your reasoning.  I know there has been further guidance issued on this since then.  My clients wouldn't qualify under the rental property safe harbor election since they don't spend at least 250 hours a year on each property.  I haven't been able to find any guidance that clearly states if they can take the Section 199A deduction.  Any help would be appreciated.  Thanks!

[Jack R]

Notice 2019-07 gives clear instructions related to the 250 hour requirement.  If the client has multiple rentals an election can be made to treat as one property to help with the hours.

If they now qualify as a business under 199A then you should have them file 1099-Misc for services over $600.

[mdavolio]

Hi Marianne,

Here is a link to Notice 2019-07, Section 199A Trade or Business Safe Harbor: Rental Real Estate (with some relevant excerpts below): https://www.irs.gov/pub/irs-drop/n-19-07.pdf

- It is true that Form 1099-MISC is required only when payments are made in the course of your trade or business.  But you may qualify for the QBI deduction under the new safe harbor even if you're not in a section 162 trade or business.

- The safe harbor is available to taxpayers who seek to claim the deduction under section 199A with respect to a rental real estate enterprise.

- Solely for purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.  Taxpayers must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rents.

- For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental enterprise.

- Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners.

Thank you,

Mike D'Avolio

Intuit

[IntuitJim · Accepted solution]

Marianne, thanks for joining Community!

“My clients wouldn't qualify under the rental property safe harbor election since they don't spend at least 250 hours a year on each property.”  The Safe Harbor election of 250 hours applies to the ENTERPRISE, not EACH property.

Additionally, service hours include services performed by owners, employees, and independent contractors and time spent on maintenance, repairs,  collection of rent, payment of expenses, provision of services to tenants, and efforts to rent the property. Hours spent by any person with respect to the owner’s capacity as an investor, such as arranging financing, procuring property, reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements, and traveling to and from the real estate are not considered to be hours of service with respect to the enterprise. Here is more on Safe Harbor provisions:

https://accountants-community.intuit.com/articles/1797483&src=51247

And the Safe Harbor is just one way your client can qualify as a Section 162 active trade or business. I think the December instructor had good intentions about the 1099 filing, but the subsequent guidance from IRS in January never mentions it.

Good luck!

[Marianne]

I do not want to aggregate the properties.

[Marianne]

As far as starting to file 1099-misc's I believe that would leave my clients liable during an audit for the IRS to go back and say they were required to file them in previous years which would create additional taxes and penalties.

[MikeZ21]

Schedule E rental income is QBI.  Whether or not you file 1099MISC forms is not an issue.