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26 minutes ago, DANRVAN said:

It works the other way Robert.  As the tax courts like to say tax deductions are granted by "legislative grace."

 

The IRS and Congress have given us information to make an informed decision.

Realistic possibility of success. Considering multiple experts have given an opinion, outlined their reasoning and I think it makes sense, we haven't taken a frivolous position.

One of the reasons tax courts exist is that not all choices are specifically outlined or addressed by IRS rules.

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“IRS declined to provide any further guidance on when a rental qualifies nor any bright line test - trade or business is still the standard.  It specially says it will not reference 469 for 199A purposes.

HOWEVER, Notice 2019-07 will provide a SAFE HARBOR: Under the proposed safe harbor, a rental real estate enterprise may be treated as a trade or business for purposes of section 199A if at least 250 hours of services are performed each taxable year with respect to the enterprise. This includes 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.

however a rental activity can still meet the trade or business test while not meeting the safe harbor.”

Anybody know where I can find notice 2019-07?

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SECTION 4. EFFECTIVE DATE AND IMMEDIATE RELIANCE The proposed revenue procedure is proposed to apply generally to taxpayers with taxable years ending after December 31, 2017. Until such time that the proposed revenue procedure is published in final form, taxpayers may use the safe harbor described in the proposed revenue procedure for purposes of determining when a rental real estate enterprise may be treated as a trade or business solely for purposes of section 199A.

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On 1/18/2019 at 3:15 PM, TAXMAN said:

I may have jumped the gun. It smells like in 2018 we will be ok, 2019 need the logs? I need some help here please.

Per Section 3, .03, (C) of the safe harbor:

The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.

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06 Procedural requirements for application of safe harbor. A taxpayer or RPE must include a statement attached to the return on which it claims the section 199A deduction or passes through section 199A information that the requirements in Section 3.03 of this revenue procedure have been satisfied. The statement must be signed by the taxpayer, or an authorized representative of an eligible taxpayer or RPE, which states: “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.” The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the statement.

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>>>>>>“IRS declined to provide any further guidance on when a rental qualifies nor any bright line test - trade or business is still the standard.  It specially says it will not reference 469 for 199A purposes.<<<<<<<

I personally have not found this statement yet. Doesn't mean it's not fact. Please provide a reference.

It appears it is much easier to determine if the RPE rises to a trade or business under section 162 than having a client provide the log hours. I have two  real estate rental partnerships, that have two 50/50 partners with a total of 24  properties that invest, maintain and control all aspects of the activity. There is a profit motive, and continuity which meets the requirements of a trade or business under section 162. While in this scenario the calculations for QBI are going to be involved, I am of the opinion they still qualify for the QBID. 

Any comments are welcome.

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Also, in my post above, the 250 hour requirement would be met by both partners. So, I will let the partners make the decision as to whether they want to take on the task of maintaining activity logs for TY 2019 and beyond. For TY 2018, the section 162 requirements will be used as I am sure neither one of these folks will have the activity logs.

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Hours of work is a bizarre method. As an example my sister in law didn't show up to a family event a few years ago and I asked my brother why. He commented that she was doing her father's tax return and I said that couldn't take very long. His response was that it was a 3-4 hour job that was now in week 3. My Bro and SIL were at one time CPAs.

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If I read the notice about the safe harbor right, the 250 hours are not necessarily provided by the partners and not necessarily documented by a log.  Part of the time counted towards this could be by contractors, and the time shown on the invoice they send you could be counted towards the 250 hours based on that invoice.  Did anyone else read it that way? 

I am just getting tired of the service requiring separate signature statements for everything - I thought when the taxpayer signed the tax return it was under penalty of perjury and applied to everything on the return. 

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22 minutes ago, Gail in Virginia said:

If I read the notice about the safe harbor right, the 250 hours are not necessarily provided by the partners and not necessarily documented by a log.  Part of the time counted towards this could be by contractors, and the time shown on the invoice they send you could be counted towards the 250 hours based on that invoice.  Did anyone else read it that way? 

I am just getting tired of the service requiring separate signature statements for everything - I thought when the taxpayer signed the tax return it was under penalty of perjury and applied to everything on the return. 

Gail, I agree. The paragraph below is taken from the revenue procedure and is fairly straight forward. So, if a rental property owner hires an HVAC contractor to replace the Heating/Cooling unit, those hours should be documented and apply toward the 250. Same with a roof replacement or lawn maintenance.

.04 Rental services. Rental services for purpose of this revenue procedure include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors. Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners. The term rental services does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.
 

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  • 5 weeks later...
On ‎1‎/‎14‎/‎2019 at 9:20 PM, SaraEA said:

To add to the confusion, this from the recently released draft of Pub 535, pg 2.  The draft is dated Jan 7.  Emphasis added. 

https://www.irs.gov/pub/irs-dft/p535--dft.pdf

I
In general, to be engaged in a trade or busi-
ness, you must be involved in the activity with
continuity and regularity and your primary pur-
pose for engaging in the activity must be for in-
come or profit. If you own an interest in a
pass-through entity, the trade or business de-
termination is made at that entity's level.
The ownership and rental of real property
doesn’t, as a matter of law, constitute a trade or
business, and the issue is ultimately one of fact
in which the scope of your activities in connec-
tion with the property must be so extensive as
to give rise to the stature of a trade or business.
However, the rental or licensing of property to a
commonly controlled trade or business is con-
sidered a trade or business under section 199A.
 
 

 

 

I'm looking at Pub 535 2018, dated January 25, 2019.  I don't see this on page 2.  Are you quoting from a draft?  Has it been included in the actual Pub 535?  I do see this on page 50, left column under Chapter 12 - Qualified Business Income Deduction.  The language in your 2nd part is slightly different.

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On ‎1‎/‎9‎/‎2019 at 11:24 AM, cbslee said:

Actually the presenter at OSCPA seminar that  I attended yesterday said that he would claim QBI in scenarios like this.

When I walked into the seminar I wouldn't have claimed it, however after spending 3 hours on 199 A he completely changed my mind ! 

cbslee, are you saying that you consider most of your rentals to be a trade of business regardless of the safe harbor rules?  There has been a lot of discussion of the safe harbor rules, but even if someone doesn't meet the safe harbor rules, he may still be treated as a trade or business for purposes of QBI if it is a 162 trade or business.  When I look at 162, there's no definition, just expenses that are necessary and ordinary and whatever.  Are you saying most rentals would meet the 162 requirement?  If so, why bother with safe harbor?  And how would we document that we think the rental activity is a 162 trade or business?

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1 hour ago, Randall said:

cbslee, are you saying that you consider most of your rentals to be a trade of business regardless of the safe harbor rules?  There has been a lot of discussion of the safe harbor rules, but even if someone doesn't meet the safe harbor rules, he may still be treated as a trade or business for purposes of QBI if it is a 162 trade or business.  When I look at 162, there's no definition, just expenses that are necessary and ordinary and whatever.  Are you saying most rentals would meet the 162 requirement?  If so, why bother with safe harbor?  And how would we document that we think the rental activity is a 162 trade or business?

I attended this seminar prior to the release of the safe harbor notice. The safe harbor notice has completely flipped my understanding.

Now I think that all of my rentals except one do not qualify. The one that might qualify is problematic because of the contemporaneous log requirement,

which my client would be very unlikely to maintain.

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10 hours ago, cbslee said:

I attended this seminar prior to the release of the safe harbor notice. The safe harbor notice has completely flipped my understanding.

Now I think that all of my rentals except one do not qualify. The one that might qualify is problematic because of the contemporaneous log requirement,

which my client would be very unlikely to maintain.

Thanks for the clarification.  So is it safe to say most rentals with one or two houses would not meet the 162 level.  Then they must meet the safe harbor rules.  Can any of these small rental clients come up with 250 hours?  That's over 20 hours a month, 5 hours a week.

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This topic is being discussed a lot on the TaxTalk group.  There seems to be good reason to consider a rental activity a trade or business even if safe harbor is not met.  I received my recent Tax Action Memo from Thomson Reuters today.  Trade or Business per 162 was discussed and they referenced a number of cases. Gilford, Fackler, Murtaugh, Estate of Gibney and Legreide where court held a rental real estate activity was a trade or business.  Grier, Jackson, Union National Bank of Troy where court held rental real estate activity was not a trade of business.  The cases where was not held to be a trade or business had reasons that would not seem to apply to most small rental clients.

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Yes, the case law is on the side of trade or business as long as the rental has profit motive and/or expected increase in value (barring triple-net and vacation).  I am taking 199A for my own rentals and for most of my clients with them.  A safe harbor is just that.  Rentals have always been a facts & circumstances issue so I weigh the facts & circumstances.

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  • 6 months later...

I am rejuvenating this topic now that some time has passed since the latest discussion in the height of tax season.  I know that I risk being accused of beating a dead horse.  However, I feel that my horse is not dead and it is keeping me up at night.

Likely there are others who are working on extended returns and struggling with the question:  "Does this rental rise to to the level of a Qualified business under section 162?".  I have read countless articles and discussions on this topic.  Reading through the IRS reg is really no help.  It pretty much  says that is is not going to give that "bright line rule"  that so many are seeking.  Indeed Facts and Circumstances.  I don't know that I trust myself to interpret the facts and circumstances on my own.  I know the whole things with the Safe Harbor.  I don't know that any of mine would qualify under that, but I do have some that I truly believer are qualifying businesses.

We know that people have been stewing on this for many months now.  I have taken a number of webinars seeking some specifics.  Pretty much what I get is lots of details about SSTB and income limits but when it come to rentals, they all say, "Your rental could qualify if it rises to the level of a trade or business. "  No specifics!

Do  any of you have any recent articles or discussions that I can read that could give me some piece of mind that i am on the right track? 

It would be great if some of you would share your experiences:  which rentals you determined do qualify and which you decided do not and your reasoning.

Thank you so much for your help!  I really appreciate any input you would offer Laura

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