On January 18, the IRS and Treasury released final regulations under Section 199A. The IRS concurrently released Notice 2019-07, which contains a proposed revenue procedure that provides a safe harbor under which a rental real estate enterprise may be treated as a trade or business solely for purposes of the Section 199A deduction. Under Section 199A, non-corporate taxpayers are provided a deduction of up to 20% of qualified business income from each of their qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. An enterprise that fails to satisfy the safe harbor requirements found in Notice 2019-07 still may be treated as a trade or business for purposes of Section 199A if it otherwise meets the definition of a trade or business provided in the final regulations.
The proposed revenue procedure applies generally to tax years ending after December 31, 2017. Notice 2019-07 states that taxpayers may use the safe harbor in the proposed revenue procedure until the proposed revenue procedure is published in final form.
The following addresses the key issues affecting those in the real estate industry.
The issuance of Notice 2019-07 concurrently with the final regulations illustrates that the IRS and Treasury recognize that landlords need more certainty regarding their ability to take the 20% deduction under Section 199A. However, as a result of the 250-hour minimum, triple net lease exclusion, and inability to aggregate residential and commercial real estate enterprises, the scope of taxpayers that will be able to avail themselves of the safe harbor in lieu of a complicated Section 162 trade or business analysis is unclear.
Principal, National Real Estate Tax Technical Leader, PwC US