NEW RULES FOR OWNERS OF RENTAL PROPERTIES
In accordance with Revenue Procedure 2019-7 issued 1/18/2019
In accordance with Revenue Procedure 2019-7 issued 1/18/2019
If you are an owner of one or more rental properties you might benefit from Internal Revenue Code Section 199A, which allows you to exclude some of your net rental income (if any) from your taxable income. If your property requires only a small amount of time to manage (less than 250 hours per year), or your rental results in a net loss (with depreciation included), these new rules probably do not apply to you.
In order to qualify for this tax break, your property or properties must “rise to the level of a trade or business”. The Revenue Procedure (preliminary at this point in time) says your rental activity (or multiple rentals if you choose to treat them as a combined enterprise, with the understanding that commercial properties cannot be grouped with residential properties) will rise to the level of a trade or business if you meet all three of the following requirements:
1) Separate books and records are maintained for each rental activity (or the combined enterprise if grouped together),
2) 250 hours or more of “rental services” (defined below) are performed per year of the activity or combined enterprise, and
3) Contemporaneous records are maintained, including time reports or similar documents, which contain the hours, description, dates, and who performed the
services.
Rental services include the time spent:
· Advertising to rent
· Negotiation and executing leases
· Verifying tenant applications
· Collection of rents
· Daily operation and maintenance
· Management of the real estate
· Purchase of materials
· Supervision of employees and independent contractors (1099’s must be issued)
The services may be performed by yourself (and spouse if he/she is a co-owner), employees, agents, and/or independent contractors. Rental services do not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or operational reports; planning, managing, or constructing long-term capital improvements. Time spent traveling to and from the real estate also does not count.
If your rental property does qualify as a trade or business, then you must follow the rules for issuing 1099’s. You should issue a 1099-NEC to an individual that you pay $600 or more during the year for services they perform on your rental. The due date for the 1099’s for most years is January 31.
These rules will not apply to certain rental activities, such as any residence that you also use a personal residence, and properties rented on a triple net basis.
I would recommend using excel or similar worksheet to keep track of your hours. It is critically important that the records be contemporaneous, which means you should immediately record the activity the day it is performed.
Tom Horner
The Tax Advantage
(925)754-9299 / (925)685-2137
thetaxad.com
[email protected]
In order to qualify for this tax break, your property or properties must “rise to the level of a trade or business”. The Revenue Procedure (preliminary at this point in time) says your rental activity (or multiple rentals if you choose to treat them as a combined enterprise, with the understanding that commercial properties cannot be grouped with residential properties) will rise to the level of a trade or business if you meet all three of the following requirements:
1) Separate books and records are maintained for each rental activity (or the combined enterprise if grouped together),
2) 250 hours or more of “rental services” (defined below) are performed per year of the activity or combined enterprise, and
3) Contemporaneous records are maintained, including time reports or similar documents, which contain the hours, description, dates, and who performed the
services.
Rental services include the time spent:
· Advertising to rent
· Negotiation and executing leases
· Verifying tenant applications
· Collection of rents
· Daily operation and maintenance
· Management of the real estate
· Purchase of materials
· Supervision of employees and independent contractors (1099’s must be issued)
The services may be performed by yourself (and spouse if he/she is a co-owner), employees, agents, and/or independent contractors. Rental services do not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or operational reports; planning, managing, or constructing long-term capital improvements. Time spent traveling to and from the real estate also does not count.
If your rental property does qualify as a trade or business, then you must follow the rules for issuing 1099’s. You should issue a 1099-NEC to an individual that you pay $600 or more during the year for services they perform on your rental. The due date for the 1099’s for most years is January 31.
These rules will not apply to certain rental activities, such as any residence that you also use a personal residence, and properties rented on a triple net basis.
I would recommend using excel or similar worksheet to keep track of your hours. It is critically important that the records be contemporaneous, which means you should immediately record the activity the day it is performed.
Tom Horner
The Tax Advantage
(925)754-9299 / (925)685-2137
thetaxad.com
[email protected]
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