Article Date:
February 2019

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IRS Creates a New “Safe Harbor” for Section 199A Rental Properties

Safe harbor! It sounds wonderful.


Obviously, you are going to be comfortable in a safe harbor. And if you said you don’t want comfort, you might be thought of as a little loony.


You may sense that we are not jumping with joy about this new safe harbor for Section 199A rental property. It’s true; our joy quotient is a little low on this safe harbor because of the work involved.


Our feeling is that you did this work, so your property is a trade or business with no safe harbor needed. Of course, the safe harbor gives you comfort, so we need to examine what’s involved.


With the new safe harbor, the IRS thinks it is your new friend when it comes to claiming the Section 199A 20 percent tax deduction on your rental real estate profits.


Your new friend created a fork in the road by giving you an alternative method for finding out whether your rentals qualify for the new 20 percent tax deduction. So now you have a choice between the following two methods:



Claim that the rentals are trades or businesses under existing law.


Use the new safe-harbor rules.1


When you meet the new safe-harbor rules, the IRS deems your rental a trade or business with net rental profits that are qualified business income (QBI) for the Section 199A tax deduction.


But you may not want to use the safe-harbor rules, because they contain some onerous provisions. Also, you may not qualify to use the safe harbor. No problem. You can simply use the second method and win your 199A tax deduction using the existing trade or business tax law rules. ... Log in to view full article.

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