The
Internal Revenue Service has issued final rules on the 20 percent
business income deduction (Sec. 199A of the Tax Code) that was enacted in late
2017 as part of the Tax Cuts and Jobs Act.on the 20 percent
business income deduction (Sec. 199A of the Tax Code) that was enacted in late
2017 as part of the Tax Cuts and Jobs Act.
Among other things, the rules confirm that the deduction applies to your
business income, as a real estate agent or broker, if you operate as a sole
proprietor or owner of a partnership, S corporation, or limited liability
company. It applies even if your income exceeds a threshold set in the law of
$157,500 for single filers and $315,000 for joint filers.
Among other things, the rules confirm that the deduction applies to your
business income, as a real estate agent or broker, if you operate as a sole
proprietor or owner of a partnership, S corporation, or limited liability
company. It applies even if your income exceeds a threshold set in the law of
$157,500 for single filers and $315,000 for joint filers.
In addition, the rules provide guidance that NAR has been seeking on two other
provisions of importance to you: 1) whether any real estate rental income you
have is eligible for the deduction, and 2) how the deduction applies to
properties you’ve exchanged under Sec. 1031 of the tax code.
In addition, the rules provide guidance that NAR has been seeking on two other
provisions of importance to you: 1) whether any real estate rental income you
have is eligible for the deduction, and 2) how the deduction applies to
properties you’ve exchanged under Sec. 1031 of the tax code.
Eligibility of rental
income
If you generate rental property income, that income can also qualify for the
new deduction, as long as you can show that your rental operation is part of a
trade or business. The IRS has released proposed guidelines that include a
bright-line test, or safe harbor, for showing that your rental income rises to
the level of a trade or business. Under that safe harbor, you can claim the
deduction if your rental activities—which include maintaining and repairing
property, collecting rent, paying expenses, and conducting other typical
landlord activities—total at least 250 hours a year. If your activity totals
less than that, you can still try to take the deduction, but you’ll have to be
prepared to show the IRS that your activity is part of a trade or
business.
If you generate rental property income, that income can also qualify for the
new deduction, as long as you can show that your rental operation is part of a
trade or business. The IRS has released proposed guidelines that include a
bright-line test, or safe harbor, for showing that your rental income rises to
the level of a trade or business. Under that safe harbor, you can claim the
deduction if your rental activities—which include maintaining and repairing
property, collecting rent, paying expenses, and conducting other typical
landlord activities—total at least 250 hours a year. If your activity totals
less than that, you can still try to take the deduction, but you’ll have to be
prepared to show the IRS that your activity is part of a trade or
business.
Eligibility of 1031
like-kind exchanges
Under earlier proposed regulations, if your income was above threshold levels
set in the tax law—$157,500 for single filers, $315,000, for joint filers—and
you had exchanged one property for another to defer taxes under Sec. 1031 of
the tax code, the amount of the new deduction might be reduced because of the
swap. NAR and other trade groups reached out to the IRS to change this
treatment, and the IRS has made that change. Under the final rules, you can use
the unadjusted basis of the depreciable portion of the property to claim at
least a partial deduction.
Under earlier proposed regulations, if your income was above threshold levels
set in the tax law—$157,500 for single filers, $315,000, for joint filers—and
you had exchanged one property for another to defer taxes under Sec. 1031 of
the tax code, the amount of the new deduction might be reduced because of the
swap. NAR and other trade groups reached out to the IRS to change this
treatment, and the IRS has made that change. Under the final rules, you can use
the unadjusted basis of the depreciable portion of the property to claim at
least a partial deduction.
collaboration between NAR, our members, and the administration,” says NAR
President John Smaby. “They reflect many changes that NAR sought to ensure
the new 20 percent deduction applies as broadly as possible.”
