The Tax Cuts and Jobs Act of 2017 was experienced by many investors in the real estate industry as a confounding law whose rules and incentives had an uncertain effect on the taxes they would be required to pay. Things got so confusing that the IRS saw need to clarify how, in particular, the 20 percent pass-through deduction would affect such investors.
The new rules allow certain business owners to deduct 20 percent of their qualified business income—so long as their taxable business income is below $157,500 (if the person is filing as single) or $315,000 (if filing as married).
The key is that if taxable income remains after other deductions—such as those for travel—have been taken, the safe harbor provision in the Act may still benefit the real estate investor.
The safe harbor provision is centered around the circumstances under which a “rental real estate enterprise”—which is an interest in real property that is owned by an individual, a partnership (not including publicly-traded partnerships), an S-Corporation, or a disregarded entity—can be considered to qualify as a “trade or business.” To qualify as such a trade or business, the enterprise must:
- Maintain separate books and records that reflect income and expenses for every rental real estate activity or sub-enterprise (which may be organized under one enterprise so long as all of the properties are either residential or commercial—no mixing).
- Actively perform at least 250 hours of rental services.
- Maintain simultaneous records containing time reports and other such documents about the hours of services performed, the dates on which these services were performed, who performed these services, and a comprehensible description of the services performed.
Naturally, these requirements just scratch the surface of the requirements that one must meet. For example, for every independent contractor a real estate enterprise hires and pays more than $600 over the course of the year, the enterprise will have to issue a Form 1099.
The best course of action for real estate investors is to consult with either a qualified accountant or attorney—or both. If you’re looking to invest in real estate in Tempe or anywhere else in the state of Arizona, Provident Law’s real estate attorneys stand ready to help. We structure, negotiate and document a variety of real estate and financing transactions, such as leases, purchase and sale agreements, loans and development agreements for a variety of commercial and residential projects. Contact us for more details.
Christopher J. Charles is the founder and Managing Partner of Provident Law ®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS ® (the “AAR”). Mr. Charles holds the AV ® Preeminent Rating by the Martindale-Hubbell Peer Review Ratings system which connotes the highest possible rating in both legal ability and ethical standards. He serves as an Arbitrator and Mediator for the AAR regarding real estate disputes; and he served on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.
Christopher is a licensed Real Estate Instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at Chris@ProvidentLawyers.com or at 480-388-3343.