Part III - Administrative, Procedural, and Miscellaneous Section 199A Trade or Business Safe Harbor: Rental Real Estate

Part III - Administrative, Procedural, and Miscellaneous

Section 199A Trade or Business Safe Harbor: Rental Real Estate

Notice 2019-07

SECTION 1. PURPOSE

This notice contains a proposed revenue procedure that provides for a safe

harbor under which a rental real estate enterprise will be treated as a trade or business

solely for purposes of section 199A of the Internal Revenue Code (Code) and

§§ 1.199A-1 through 1.199A-6 of the Income Tax Regulations (Regulations) (26 CFR

Part 1), which are being published contemporaneously with this notice. To qualify for

treatment as a trade or business under this safe harbor, the rental real estate enterprise

must satisfy the requirements of the proposed revenue procedure. If an enterprise fails

to satisfy these requirements, the rental real estate enterprise may still be treated as a

trade or business for purposes of section 199A if the enterprise otherwise meets the

definition of trade or business in § 1.199A-1(b)(14).

SECTION 2. BACKGROUND

Section 199A was enacted on December 22, 2017, as part of the act titled “An

Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on

the budget for fiscal year 2018,” Pub. L. 115-97, and was amended on March 23, 2018,

retroactively to January 1, 2018, by the Consolidated Appropriations Act, 2018, Pub. L.

2

No. 115-141. Congress enacted section 199A to provide a deduction to non-corporate

taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of

the taxpayer’s qualified trades or businesses, including those operated through a

partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20

percent of aggregate qualified real estate investment trust (REIT) dividends and

qualified publicly traded partnership income

non-corporate

taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of

the taxpayer’s qualified trades or businesses, including those operated through a

partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20

percent of aggregate qualified real estate investment trust (REIT) dividends and

qualified publicly traded partnership income.

Section 199A(d) defines a qualified trade or business as any trade or business

other than a specified service trade or business (SSTB) or the trade or business of

performing services as an employee. Section 1.199A-1(b)(14) defines trade or

business, in relevant part, as a trade or business under section 162 other than the trade

or business of performing services as an employee.

The Treasury Department and the IRS are aware that whether a rental real

estate enterprise is a trade or business is the subject of uncertainty for some taxpayers.

To help mitigate this uncertainty, the proposed revenue procedure set forth in section 6

of this notice provides for a safe harbor under which a rental real estate enterprise will

be treated as a trade or business solely for purposes of the section 199A deduction.

SECTION 3. REQUEST FOR COMMENTS

The Treasury Department and the IRS request comments on the proposed

revenue procedure set forth in section 6 of this notice. Interested parties are invited to

submit comments on this notice by [INSERT DATE 60 DAYS AFTER PUBLICATION

OF REG-107892-18 AND REG-134652-18 IN FEDERAL REGISTER]. Taxpayers may

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submit comments electronically via the Federal eRulemaking Portal at

www.regulations.gov (indicate IRS and NOT-133582-18). Alternatively, taxpayers may

submit comments to: CC:PA:LPD:PR (Notice 2019-07), Room 5203, Internal Revenue

Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Submissions

may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m

ubmit comments electronically via the Federal eRulemaking Portal at

www.regulations.gov (indicate IRS and NOT-133582-18). Alternatively, taxpayers may

submit comments to: CC:PA:LPD:PR (Notice 2019-07), Room 5203, Internal Revenue

Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Submissions

may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m.

to CC:PA:LPD:PR (Notice 2019-07), Courier’s Desk, Internal Revenue Service, 1111

Constitution Avenue, N.W., Washington, D.C. 20224.

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.

SECTION 5. DRAFTING INFORMATION

The principal authors of this notice are Robert D. Alinsky, Vishal R. Amin,

Margaret Burow, and Frank J. Fisher of the Office of the Associate Chief Counsel

(Passthroughs & Special Industries). However, other personnel from the Treasury

Department and the IRS participated in its development. For further information

regarding this notice, contact Robert D. Alinsky or Margaret Burow at (202) 317-5279 or

Vishal R. Amin or Frank J. Fisher at (202) 317-6850 (not a toll-free call).

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SECTION 6. FORM OF PROPOSED REVENUE PROCEDURE

Set forth below is the form of the proposed revenue procedure that is proposed in

this Notice:

FORM OF PROPOSED REVENUE PROCEDURE

26 CFR 1.199A-1: Trade or Business

(Also: §199A)

Rev. Proc. 2019-XX

SECTION 1

or Margaret Burow at (202) 317-5279 or

Vishal R. Amin or Frank J. Fisher at (202) 317-6850 (not a toll-free call).

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SECTION 6. FORM OF PROPOSED REVENUE PROCEDURE

Set forth below is the form of the proposed revenue procedure that is proposed in

this Notice:

FORM OF PROPOSED REVENUE PROCEDURE

26 CFR 1.199A-1: Trade or Business

(Also: §199A)

Rev. Proc. 2019-XX

SECTION 1. PURPOSE

Section 3 of this revenue procedure provides a safe harbor under which a rental

real estate enterprise will be treated as a trade or business for purposes of

section 199A of the Internal Revenue Code (Code) and §§ 1.199A-1 through 1.199A-6

of the Income Tax Regulations (26 CFR Part I). The safe harbor provided by this

revenue procedure applies solely for purposes of section 199A. If an enterprise fails to

satisfy the requirements of this safe harbor, the rental real estate enterprise may still be

treated as a trade or business for purposes of section 199A if the enterprise otherwise

meets the definition of trade or business in § 1.199A-1(b)(14).

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SECTION 2. BACKGROUND

Section 199A was enacted on December 22, 2017, as part of the act entitled “An

Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on

the budget for fiscal year 2018,” Pub. L. 115-97, and was amended on March 23, 2018,

retroactively to January 1, 2018, by the Consolidated Appropriations Act, 2018, Pub. L.

No. 115-141. Congress enacted section 199A to provide a deduction to non-corporate

taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of

the taxpayer’s qualified trades or businesses, including those operated through a

partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20

percent of aggregate real estate investment trust (REIT) dividends and qualified publicly

traded partnership income

uction to non-corporate

taxpayers of up to 20 percent of the taxpayer’s qualified business income from each of

the taxpayer’s qualified trades or businesses, including those operated through a

partnership, S corporation, or sole proprietorship, as well as a deduction of up to 20

percent of aggregate real estate investment trust (REIT) dividends and qualified publicly

traded partnership income.

Section 199A(d) defines a qualified trade or business as any trade or business

other than a specified service trade or business (SSTB) or a trade or business of

performing services as an employee. Section 1.199A-1(b)(14) defines trade or

business, in relevant part, as a trade or business under section 162 other than the trade

or business of performing services as an employee. Sections 1.199A-5(b) and 1.199A-

5(d) define an SSTB and the trade or business of performing services as an employee,

respectively.

The Treasury Department and the IRS are aware that whether a rental real

estate enterprise is a trade or business for purposes of section 199A is the subject of

uncertainty for some taxpayers. To help mitigate this uncertainty, this proposed

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revenue procedure provides a safe harbor for treating a rental real estate enterprise as

a trade or business solely for purposes of the section 199A deduction.

SECTION 3. RULES OF APPLICATION

.01 In general. This safe harbor is available to taxpayers who seek to claim the

deduction under section 199A with respect to a rental real estate enterprise. If the safe

harbor requirements are met, the real estate enterprise will be treated as a trade or

business as defined in section 199A(d) for purposes of applying the regulations under

section 199A. Relevant passthrough entities (RPEs) as defined in § 1.199A-1(b)(10)

may also use this safe harbor in order to determine whether a rental real estate

enterprise is a trade or business as defined in section 199A(d)

or requirements are met, the real estate enterprise will be treated as a trade or

business as defined in section 199A(d) for purposes of applying the regulations under

section 199A. Relevant passthrough entities (RPEs) as defined in § 1.199A-1(b)(10)

may also use this safe harbor in order to determine whether a rental real estate

enterprise is a trade or business as defined in section 199A(d). Failure to satisfy the

requirements of this safe harbor does not preclude a taxpayer from otherwise

establishing that a rental real estate enterprise is a trade or business for purposes of

section 199A.

.02 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. The individual or RPE

relying on this revenue procedure must hold the interest directly or through an entity

disregarded as an entity separate from its owner under § 301.7701-3. 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 (with the exception of those

described in paragraph .05 of this section) as a single enterprise. Commercial and

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residential real estate may not be part of the same enterprise. Taxpayers may not vary

this treatment from year-to-year unless there has been a significant change in facts and

circumstances.

.03 Safe harbor

e or

treat all similar properties held for the production of rents (with the exception of those

described in paragraph .05 of this section) as a single enterprise. Commercial and

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residential real estate may not be part of the same enterprise. Taxpayers may not vary

this treatment from year-to-year unless there has been a significant change in facts and

circumstances.

.03 Safe harbor. Solely for the purposes of section 199A, a rental real estate

enterprise will be treated as a trade or business if the following requirements are

satisfied during the taxable year with respect to the rental real estate enterprise:

(A) Separate books and records are maintained to reflect income and

expenses for each rental real estate enterprise;

(B) 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. For taxable years beginning

after December 31, 2022, in any three of the five consecutive taxable

years that end with the taxable year (or in each year for an enterprise held

for less than five years), 250 or more hours of rental services are

performed (as described in this revenue procedure) per year with respect

to the rental real estate enterprise; and

(C) The taxpayer maintains contemporaneous records, including time reports,

logs, or similar documents, regarding the following: (i) hours of all services

performed; (ii) description of all services performed; (iii) dates on which

such services were performed; and (iv) who performed the services. Such

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records are to be made available for inspection at the request of the IRS.

The contemporaneous records requirement will not apply to taxable years

beginning prior to January 1, 2019.

.04 Rental services

llowing: (i) hours of all services

performed; (ii) description of all services performed; (iii) dates on which

such services were performed; and (iv) who performed the services. Such

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records are to be made available for inspection at the request of the IRS.

The contemporaneous records requirement will not apply to taxable years

beginning prior to January 1, 2019.

.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.

.05 Certain rental real estate arrangements excluded. Real estate used by the

taxpayer (including an owner or beneficiary of an RPE relying on this safe harbor) as a

residence for any part of the year under section 280A is not eligible for this safe harbor.

Real estate rented or leased under a triple net lease is also not eligible for this safe

harbor. For purposes of this revenue procedure, a triple net lease includes a lease

agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to

be responsible for maintenance activities for a property in addition to rent and utilities

280A is not eligible for this safe harbor.

Real estate rented or leased under a triple net lease is also not eligible for this safe

harbor. For purposes of this revenue procedure, a triple net lease includes a lease

agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to

be responsible for maintenance activities for a property in addition to rent and utilities.

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This includes a lease agreement that requires the tenant or lessee to pay a portion of

the taxes, fees, and insurance, and to be responsible for maintenance activities

allocable to the portion of the property rented by the tenant.

.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.

SECTION 4. EFFECTIVE DATE

This revenue procedure applies to 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 this proposed revenue procedure for

determining when a rental real estate enterprise may be treated as a trade or business

solely for purposes of section 199A.

SECTION 5. DRAFTING INFORMATION

The principal authors of this revenue procedure are Robert D. Alinsky, Vishal R.

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Amin, Margaret Burow, and Frank J

ure is published in final form,

taxpayers may use the safe harbor described in this proposed revenue procedure for

determining when a rental real estate enterprise may be treated as a trade or business

solely for purposes of section 199A.

SECTION 5. DRAFTING INFORMATION

The principal authors of this revenue procedure are Robert D. Alinsky, Vishal R.

10

Amin, Margaret Burow, and Frank J. Fisher of the Office of the Associate Chief Counsel

(Passthroughs & Special Industries). However, other personnel from the Treasury

Department and the IRS participated in its development. For further information

regarding this revenue procedure contact Robert D. Alinsky or Margaret Burow at (202)

317-5279 or Vishal R. Amin or Frank J. Fisher at (202) 317-6850 (not a toll free call).