Does Your Rental Property Qualify for the 20% Pass-Through Deduction?
January 31, 2019
IRS guidance on new 20% deduction for rental property is here!
One of the big questions we had with the new 2018 tax law was: How does income from a rental property qualify for the 20% pass-through deduction? The law was written to say that rental income qualifies if the rental activity is a "trade or business activity" (which is not defined in tax law), rather than an investment activity. We wrote about the ambiguity of the trade or business qualification in our 2018 Year end Planning blog post and made some speculations about what may qualify. The IRS recently released guidance, giving us some clear markers to work with when making this determination.
A rental activity will generally qualify for the deduction if all the following are met:
- Separate books and records are maintained for the rental activity,
- Documentation is maintained to substantiate that at least 250 hours of services are spent on the rental in a year (does not have to be the owner's time)
- And it is not a triple net lease
Our takeaways from this new guidance are that you should:
- Start to keep a log of time spent on rental activities
- If you do have a triple net lease set up, consider amending the lease so that you, as the landlord, pay for property taxes, insurance, and repairs.
A rental activity may still qualify as a trade or business even if you don't meet all of the requirements above, but the determination will be made on a case by case basis depending on facts and circumstances.
For more details, I have linked a good article below from Forbes contributor, Tony Nitti, who does a great job of explaining tax law.