IRS finalizes safe harbor for rental real estate

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September 2019

Overview

The IRS on September 24 released Revenue Procedure 2019-38 (the final revenue procedure), which provides a safe harbor under which a rental real estate enterprise may be treated as a trade or business for purposes of the Section 199A deduction. The IRS initially issued a proposed version of this revenue procedure in January with Notice 2019-07 (the proposed revenue procedure). The final revenue procedure generally applies to tax years ending after December 31, 2017.

While the final revenue procedure generally maintains the framework laid out in the proposed revenue procedure, it also incorporates changes in response to taxpayer concerns.  Triple net leases remain excluded from application of the safe harbor in the final revenue procedure. In addition, Treasury and the IRS continue to make a distinction in the final revenue procedure between commercial and residential property so that those activities cannot be combined for purposes of satisfying the safe harbor.

The takeaway

The issuance of the final revenue procedure reflects a recognition that real estate businesses need more certainty regarding their ability to take the 20% deduction under Section 199A. The final version provides some clarification regarding certain provisions in the safe harbor - for example, with regard to mixed-use property. At the same time, the final revenue procedure retains the 250-hour requirement, does not relax the inability to combine residential and commercial businesses, and maintains the triple net lease exclusion. As a practical matter, it is unclear to what extent the final safe harbor assists taxpayers who already were not certain that their real estate activities constituted a trade or business. 

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Adam Feuerstein

Principal, National Real Estate Tax Technical Leader, PwC US

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