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Applying the “Safe Harbor” Rule to Your 2019 Taxes

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Under the Tax Cuts and Jobs Act of 2017, individual business owners of pass-through entities (partnerships, LLCs and S-Corporations) and sole proprietors are generally allowed a 20% deduction of their net “trade or business” income from their income taxes. When the Act came into effect, it was unclear whether an interest in rental real estate would qualify as a “trade or business.” Recently, the Internal Revenue Service set forth a “safe harbor” rule for taxpayers to qualify their interest in rental real estate as a “trade or business.”

A property owner must meet the following requirements to take advantage of the safe harbor rule:

  • Be regularly engaged in holding the real estate for rental
  • Perform 250 or more hours of documented rental services per year for three of the previous five years (or every year if less than five years of ownership); only certain services qualify
    • Owners of multiple properties in the same entity may aggregate their service hours so long as they are in the same category of real estate
  • Maintain separate books and records for each property simultaneously
  • Make an election annually on their tax return

However, the safe harbor rule will affect triple net lease holders differently, as these types of interests in real estate may be more difficult to meet the requirements as passive investors.

Kelleher & Buckley, LLC understands the nuances of this law and may be able to help overcome any obstacles. We can identify the types of businesses that are eligible for this deduction and help you make the wisest tax return election, especially if you have multiple properties or real estate which produces losses. Call Andrew Kelleher or David Buckley at 847-382-9130 or email us at  attorneys@kelleherbuckley.com.

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