Pass through income exclusion for rental properties

If you own investment real estate, maybe your taxes will be lower, or maybe not.

One of the most uncertain issues of 2018 tax reporting was clarified today by IRS Notice 2019-7. This notice provides a safe harbor for determination of when a rental property is a business that qualifies for the 20% exclusion from income under IRC Section 199A and its newly released accompanying regulations.

The spin-off issues are numerous and I think that the best advice is to simply discuss your specific situation rather than attempt to address all the potential disrupters from the basic rule and the safe harbor provision. It makes no sense to attempt to list all of the potential complicating issues here.

What does this mean? Owners of rental real estate should have a conversation with their tax adviser prior to filing the 2018 tax return about whether to report income the same way as in the past or if they qualify to reduce tax taxable income using the new income exclusion provisions possible under the Tax Cuts and Jobs Act. If you qualify under the safe harbor, great, your tax treatment is clear. If not, then additional facts should be considered.


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