Rental Real Estate Safe Harbor Method Explained

The IRS issued guidance in 2019 which offers a safe harbor (determined annually) for rental real estate to be treated as a trade or business for purposes of the 20% QBI deduction. Although the requirements to meet the safe harbor may be difficult to follow, they do not specifically require filing of Forms 1099- NEC.  However, the following requirements must be met.

1. Separate books and records (including bank accounts) are maintained.
2. At least 250 hours of qualifying rental services are performed per year.  If the rental real estate enterprise has been in existence at least four years, and at least 250 hours of qualifying rental services were performed in any three of the last five consecutive tax years, this condition is met.
3. Contemporaneous records are maintained regarding the hours, description, and date of all services performed, and who performed these services.  Contemporaneous means the records must be complete before the tax return is filed. 
4. Required disclosures are attached to a timely filed original return.

Qualifying Rental Services do count towards the 250 hour requirement. Such services may be performed by owners, employees, independent contractors, or agents, and include but are not limited to: advertising to rent the real estate; negotiating and executing leases; verifying tenant applications; collecting rent; operating, maintaining and repairing the property; managing the real estate; purchasing materials; and supervising employees or independent contractors.

Non-Qualifying Rental Services do not count towards the 250 hour requirement. Non-qualified services include: arranging financing; procuring property; reviewing financial statements or operational reports; planning, managing, or constructing long-term improvements; or hours spent traveling to and from the real estate. There are certain other limitations as well.

The IRS issued guidance in 2019, which offers a safe harbor (determined annually) for rental real estate to be treated as a trade or business for purposes of the 20% QBI deduction. Although the requirements to meet the safe harbor may be difficult to follow, they do not specifically require the filing of Form 1099- NEC.  However, the following requirements must be met.

1. Separate books and records (including bank accounts) are maintained.
2. At least 250 hours of qualifying rental services are performed per year.  If the rental real estate enterprise has been in existence at least four years, and at least 250 hours of qualifying rental services were performed in any three of the last five consecutive tax years, this condition is met.
3. Contemporaneous records are maintained regarding the hours, description, and date of all services performed and who performed these services.  Contemporaneous means the records must be complete before the tax return is filed. 
4. Required disclosures are attached to a timely filed original return.

Qualifying Rental Services do count towards the 250 hour requirement. Such services may be performed by owners, employees, independent contractors, or agents, and include but are not limited to: advertising to rent the real estate; negotiating and executing leases; verifying tenant applications; collecting rent; operating, maintaining and repairing the property; managing the real estate; purchasing materials; and supervising employees or independent contractors.

Non-Qualifying Rental Services do not count towards the 250 hour requirement. Non-qualified services include: arranging financing; procuring property, reviewing financial statements or operational reports; planning, managing, or constructing long-term improvements; or hours spent traveling to and from the real estate. There are certain other limitations, as well.