Page 35 - Equity Movement Magazine-Issue2

REAL ESTATE INVESTORS RESOURCES

Tax Win: IRS Provides Clear Test on Now 20% Deduction

Applies to Rental Income, Exchanges.

By: Christian F. Cartwright

The Internal Revenue Service has issued final rules on change. Under the final rules, you can use the
the 20 percent business income deduction (Sec. 199A of unadjusted basis of the depreciable portion of the
the Tax Code) that was enacted in late 2017 as part of property to claim at least a partial deduction. "The final
the Tax Cuts and Jobs Act. rules are the result of several months of advocacy and
collaboration between NAR, our members, and the
Among other things, the rules confirm that the administration," says NAR President John Smaby. "They
deduction applies to your business income, as a real reflect many changes that NAR sought to ensure the
estate agent or broker, if you operate as a sole new 20 percent deduction applies as broadly as
proprietor or owner of a partnership, S corporation, or possible." IRS Announcement
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.

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.

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

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