NAR: Real Estate Pros Get Big Win in Tax Qualified Business Income Rule
January 23, 2019
The National Association of REALTORS® is calling a recent ruling from the U.S. Treasury Department and the Internal Revenue Service on the new 20 percent deduction on qualified business income a “significant victory” for real estate professionals. The department and IRS issued their final regulations late last week regarding the qualified business income rule, providing greater clarity heading into the 2018 tax filing season.
The final guidelines allow real estate professionals to benefit from the Section 199A 20 percent passthrough deduction.
A critical component of the 2017 Tax Cuts and Jobs Act was to reduce the corporate tax rate, lowering it from 35 to 21 percent. However, nine out of 10 American businesses are structured as passthrough entities rather than corporations. As such, the Section 199A provision now provides what NAR calls “critical tax deductions” for small businesses and self-employed independent contractors. Many real estate professionals are classified as small businesses or self-employed independent contractors for tax purposes.
NAR highlighted three major provisions within the IRS and Treasury Department’s 247-page final ruling that applies to real estate professionals:
- The regulation clarifies that all real estate agents and brokers who are not employees but operate as sole proprietors or owners of partnerships, S corporations, or limited liability companies are eligible for the new deduction. The new deduction can be up to 20 percent. This also includes those whose income exceeds the threshold of $157,500 for single filers and $315,000 for those filing a joint return.
- The rule simplifies the process that owners of rental real estate property must follow to claim the new deduction. The Tax Cuts and Jobs Act specifies that only income from a “trade or business” qualifies for the 20 percent deduction. But various court rulings and prior IRS guidance sparked confusion over which rental properties are investments and which could be considered a business enterprise. NAR urged the department and IRS to simplify the rule. The final regulations have since provided clarity through a safe harbor test that requires at least 250 hours per year spent on maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities.
- The final rules also provide clarity on situations where a person exchanges one parcel of real estate under Section 1031 for another parcel. The previous rules denied deduction eligibility, but the department and IRS have since recognized the initial ruling was misguided and have corrected and clarified its policy in its final guidance.
NAR served as a strong advocate in gaining greater clarity within the IRS and Treasury Department’s final regulations. “The finalized ruling … represents a tremendous win for real estate professionals across the country,” says Shannon McGahn, NAR senior vice president of government affairs. “We are thrilled to see our members emerge from this process so favorably … and for ensuring consistency and clarity within these policies.”
Updated: July 10, 2020