New IRS Regulations to Help Real Estate Professionals

The Internal Revenue Service, along with the National Treasury, ruled in mid-January that they would allow real estate professionals to benefit from the Section 199A 20 percent pass-through deduction. It had been unclear to real estate professionals what the 2017 Tax Cuts and Jobs Act would do for them come tax season, but after the ruling on January 18th, the IRS and the Treasury issued final regulations regarding the new 20 percent deduction on qualified business income. NAR had expressed concerns through ongoing discussions with the IRS and the Treasury, and they were heard.

Originally, the Section 199A provision of the 2017 Tax Cuts and Jobs Act reduced the corporate rate from 35 to 21 percent, but an estimated 95 percent of America businesses are not considered corporations and are instead known as pass-through entities because they do not pay corporate income tax. This section now provides tax deductions for self-employed independent contractors as well as small businesses, which many real estate professionals are.

This rule also simplifies the process that owners of rental property real estate must follow in order to claim a new deduction. The original language in the Tax Cuts and Jobs Act did not give rental property owners certainty on their ability to claim deductions, but because of alterations in language and requirements, millions of rental property owners now qualify for additional deductions. These recent final regulations included a bright-line safe harbor test requiring at least 250 hours a year spent on general landlord activities such as collecting rent, paying expenses, and maintaining property.

This change in regulation also clarifies that all real estate agents and brokers who are not employees, but operate as sole proprietors, owners of partnerships, S corporations, or limited liability companies are eligible for the deduction, which can be as high as 20 percent. This includes those whose income exceeds the threshold of $157,500 for single filers and $315,000 for joint return filers.

The originally proposed regulation released last August stated that those who had exchanged one parcel of real estate under Section 1031 for another parcel were unfairly denied deduction eligibility. Because of this undue motion, NAR and multiple other groups concerned with commercial real estate spoke up to bring attention to this shortcoming. In a progressive resolution to the situation, the National Treasury and the IRS recognized the introductory ruling was flawed and amended the policy.

NAR’s Senior Vice President of Government Affairs, Shannon McGahn, is enthusiastic with the results of working closely with the IRS and National Treasury, “We are thrilled to see our members emerge from this process so favorably, and we thank the Treasury and the IRS for all of their hard work in ensuring consistency and clarity within these policies as America’s 1.3 million REALTORS® begin filing their 2018 tax returns in the coming weeks.”

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