When is Rental Real Estate a “Trade or Business” Under 199A?

Steve Leimberg’s Income Tax Planning Email Newsletter Archive Message #175

Date:18-Feb-19

Subject: Alan Gassman & Martin Shenkman – When is Rental Real Estate a “Trade or Business” Under 199A?

“The 2017 Tax Cuts and Jobs Act introduced the new, and sometimes problematic, Section 199A to the Internal Revenue Code. Section 199A was designed to provide taxpayers with a twenty percent (20%) deduction for qualified business income (QBI) earned through qualifying ‘trades or business.’ This deduction for business owners was added in response to the significant tax cut the Act created for large corporations. Unfortunately, among other myriad complexities and uncertainties in 199A, there is no single accepted definition of ‘trade or business’ so many taxpayers have been in limbo not knowing whether their activities qualify. Once a practitioner has parsed through this complexity to determine if a real estate rental arises to the level of a trade or business, the Regulations contain an array of ancillary provisions, exceptions and special rules that may affect the application of that determination or even negate it.

On January 18th, the IRS released the highly anticipated Final Regulations intended to shed light on the many confusing aspects of Section 199A. Much like the Proposed Regulations, the Final Regulations do not provide a bright line definition of ‘trade or business.’ The Final Regulations state that for the purposes of Section 199A, a qualifying trade or business is defined as a trade or business under Section 162 of the Internal Revenue Code other than the trade or business of performing services as an employee.
This newsletter will focus primarily on using the new Final Regulations as well as previous court decisions to define and understand what is meant by the term ‘trade or business’ for purposes of determining whether a real estate investor with a triple net lease can qualify for the 199A deduction under the Final Regulations, as corrected.”

Alan Gassman and Martin Shenkman provide members with important commentary that examines an issue that many advisors and their clients are struggling with, namely, when is rental real estate a “trade or business” for Section 199A purposes?

Alan Gassman, JD, LL.M. is the founding partner of the law firm of Gassman, Crotty & Denicolo, P.A., in Clearwater, Florida. Alan is a frequent contributor to LISI, and has authored several books and many articles on Estate and Estate Tax Planning, Trust Planning, Creditor Protection Planning, and associated topics. You can contact Alan at agassman@gassmanpa.com.

Martin M. Shenkman, CPA, MBA, PFS, AEP, JD is an attorney in private practice in Fort Lee, New Jersey and New York City who concentrates on estate and closely held business planning, tax planning, and estate administration. He is the author of 42 books, more than 1,200 articles, and, is a Director for the National Association of Estate Planners & Councils.

Here is their commentary: