Are Rental Property Businesses Under Fire? Schedule 199A to the Rescue

Is your rental property business under fire or are you about to get lucky? Brace yourself—for once in this year of tax code changes, you’re about to get lucky—as long as your rental property qualifies as a bona fide business.

How do you know if your rental property makes the cut? There are several criteria that if met will answer that question. But first, let’s talk about the good news: Schedule 199A.

If your rental property is a tax law–defined rental business it will qualify for the new 20 percent tax deduction under Section 199A.

If the rental property you own earns a profit, it qualifies as a business. It doesn’t matter whether you manage it or you hire a management company, it still qualifies for the 199A deduction.

Here’s an example: After the death of their parents, three siblings, who inherited equal portions of their parents’ home, decided to retain ownership and rent the property for the residual income it would generate.

They all lived out of town so they hired John, who owned a real estate management company, to manage the property. John dealt with repairs, collecting rent and other management-related issues. After the tenant paid rent, John deducted his percentage and then paid each of the siblings their portion of the net income.

It’s clear that John owned his management business, but did the siblings legally own a rental business? Even though they spent no time managing the property, the answer is yes.

 

Here’s how it works:

The rental property required investing considerable time and effort in collecting rent, hiring handy-people or appliance-repair personnel and making repairs. John acted for the family in that capacity and was under their control and so they (the siblings) are legally determined to be in business.

 

Tax Issues

There are several other tax-related reasons you’ll need to determine whether your property is a business or an investment. If you get it wrong, there are critical tax consequences.

Does it matter whether your rental property is a single-family home or a multi-unit apartment building? No.

If you’re a business owner, you get valuable tax deductions beyond the 20 percent tax deduction you get from Schedule 199A. Investors don’t qualify for them. So although investing has its own set of advantages, for tax purposes, it’s always more advantageous for you to set up your rental activity to be a business.

 

Would you like help discerning whether your rental properties qualify for the new 20 percent Section 199A tax deduction, please call one of our qualified tax professionals.

 

 

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