December 10, 2019 - Douglas Myser

Rental properties safe harbor rules. The IRS has issued safe harbor guidelines for the owners of rental properties in order to qualify for the new 20% deduction (Section 199A). While your rental activities may be considered an eligible trade or business with appropriate substantiation, the IRS has provided the following requirements if you elect to use the safe harbor method of qualifying for the deduction. Keep a separate set of books for your rental activities--record the income and expenses for each property separately. Financial statements should be available for each rental property with supporting documentation of the expenses occurred. Bank statements and credit card statements are not sufficient substantiation. All receipts/purchase and orders and contracts should be retained either in a paper file or in a scanned document file. Rental properties safe harbor rules.

Any rental property in which you have personally resided or with which you have a triple net lease will not qualify for the safe harbor and financial records must be maintained independently of other rental properties. Keep a contemporaneous journal of rental activities--per the new tax regulations a minimum of 250 hours must be performed in respect to your rental properties. This includes such activities as: advertising to rent or lease the real estate: negotiating and executing leases: verifying information contained in prospective tenant applications: collection of rent: daily operation, maintenance, and repair of property: management of the real estate (which would include the time spent meeting the contemporaneous journal and bookkeeping requirements): purchase of materials: and supervision of employees and independent contractors. Rental properties safe harbor rules.

Note that traveling to and from your rental properties is not included in calculating the 250 hours per year of rental activity or activities related to properties in which you resided or have a triple net lease. These requirements are solely for the purpose of qualifying for the IRS Section 199A deduction safe harbor and do not constitute a change in the reporting of rental income and expenses.

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