The IRS recently issued some guidelines that allow real estate investors to take a tax deduction for up to 20% of the income they generate from rental properties. These guidelines were issued in January 2019 to clarify certain provisions of the 2017 Tax Cuts and Jobs Act. Click here to view the full announcement and the new guidelines.
The new tax deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels are still eligible for the deduction but are subject to limitations. In order to qualify for the deduction, the taxpayer must meet three requirements:
1 – Maintain separate books and records to reflect income and expenses for each property or group of properties.
2 – Perform 250 or more hours of rental services per year. Rental services 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 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.
3 – Maintain contemporaneous records, including time reports, logs, or similar documents, regarding the following:
- (i) hours of all services performed;
- (ii) a description of all services performed;
- (iii) the dates on which such services were performed; and
- (iv) who performed the services.
The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019.
Keep in mind that real estate used by the taxpayer for any part of the year does NOT qualify for the deduction (such as a rental property that’s also used as a vacation home).
PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS TAX BULLETIN IR 2019-04.
Source: CMPS Institute