QBI Regulations - Schedule E rental

Technical topics regarding tax preparation.
#1
Wiles  
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Regarding the QBI Regulations that came out today, Spidell sent an e-mail blast that included the following:
Schedule E rental income will not qualify for the IRC §199A deduction except in the case of property rented to a related trade or business under common control (the self-rental rules). This is because the definition of "trade or business" will borrow from IRC §162 and its regulations.

I am trying to find this discussion in the IRS document. https://www.irs.gov/pub/irs-drop/reg-107892-18.pdf. Can somebody please point this out to me?
 

#2
Wiles  
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I guess it is here on Page 10:
The proposed regulations extend the definition of trade or business for purposes of section 199A beyond section 162 in one circumstance. Solely for purposes of section 199A, the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled under proposed §1.199A-4(b)(1)(i).

I am not sure that Spidell's statement is exactly correct.
 

#3
irc162  
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Okay...this is something of a bombshell since most of the earlier discussions of the new law (at least the ones I read) seemed to indicate that the deduction would be extended to rental property. There is another complication. What about those tapayers who have made the Section 469 election which allows qualified real estate professionals to treat rental income as being the income of a real estate trade or business and therefore not subject to passive loss rules? There is another section of the new regs that specifies that real property management is not a Specified Service Business. I wonder if there will be any crossover between the 469 election and Section 199A?
 

#4
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Yeah that is not what it says at all. It says that a rental must be a 162 Trade or Business -OR- property rented to a related trade or business.

Its discussed in several places:

(13) Trade or business means a section 162 trade or business other than the
trade or business of performing services as an employee. In addition, rental or licensing
of tangible or intangible property (rental activity) that does not rise to the level of a
section 162 trade or business is nevertheless treated as a trade or business for
purposes of section 199A, if the property is rented or licensed to a trade or business
which is commonly controlled under §1.199A-4(b)(1)(i) (regardless of whether the rental
activity and the trade or business are otherwise eligible to be aggregated under
§1.199A-4(b)(1)).


Of course when a rental is actually a 162 trade or business is a matter of facts and circumstances, but I have always held the bar pretty low.
 

#5
WEISSEA  
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Well a lot of my expert tax courses said retnal real estate is QBI as long as actively managed, but Regs say must be a 162(a) trade or business. So I am thinking rental activity must rise to a Schedule C based on Pub 527(must provide substantial services). Any thoughts?

Pub 527 Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. Providing substantial services. If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership. Substantial services don’t include the furnishing of heat and light, cleaning of public areas, trash collection, etc.
 

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No, the requirement to be Schedule C is not the same as to be a trade or business. Schedule C is based on IRC 1402, not 162.

Lots of case law on this, for example:

Balsamo v. Comm’r., T.C. Memo 1987-477
 

#7
irc162  
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The other interesting thing is that, at the last minute, Congress added "2.5% of unadjusted basis" to the limitation section. This would seem to be there in order to allow a deduction to the owners of rental property since rentals do not commonly pay W-2 wages. To my mind, that would imply that Congress was anticipating that the deduction would apply to rental property.
 

#8
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irc162 wrote:This would seem to be there in order to allow a deduction to the owners of rental property

Don't other types of businesses besides rentals have unadjusted basis?
 

#9
irc162  
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makbo wrote:
irc162 wrote:This would seem to be there in order to allow a deduction to the owners of rental property

Don't other types of businesses besides rentals have unadjusted basis?


Yes, of course they do. But other types of businesses are more likely to pay W-2 wages. If the limitation was tied to a percentage of W-2 wages and nothing else, many owners of Schedule E rental property would not get a deduction at all if their income is above the threshold.
 

#10
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irc162 wrote:The other interesting thing is that, at the last minute, Congress added "2.5% of unadjusted basis" to the limitation section. This would seem to be there in order to allow a deduction to the owners of rental property

I believe it's a matter of public record (but could be wrong) that this was added to buy the vote of one Republican senator for the tax legislation. So we should probably just ask him what he meant (and I'm pretty sure it was a him).
 

#11
Wiles  
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From Dave Fogel's articles on his website (written prior to these Regs):

DOES NET RENTAL INCOME QUALIFY FOR THE SECTION 199A DEDUCTION?

Whether the taxpayer’s ownership and rental of real property constitutes a trade or business depends upon the facts and circumstances of the case.(footnote 23). Historically, the courts have held that the rental of even a single property may constitute a trade or business under various provisions of the code.(footnote 24)

Various provisions? But does it under Sec 162?
Last edited by Wiles on 8-Aug-2018 5:37pm, edited 1 time in total.
 

#12
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Spidell’s email appears to be referring to proposed reg 1.199A-1(b)(13) (quoted in #4 above), which provides a special rule for a rental activity that does not rise to the level of a business where the property is rented to a commonly-controlled business.

This is NOT what Spidell is saying. Spidell is saying flat out that except for this special rule, Schedule E rental income doesn’t qualify for the deduction.

I hope that Spidell retracts its statement, because I believe they’re wrong. Under 199A(c)(3)(A), if the rental income is “effectively connected with the conduct of a trade or business within the United States,” then it qualifies for the deduction.
 

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dave829 wrote:I hope that Spidell retracts its statement, because I believe they’re wrong. Under 199A(c)(3)(A), if the rental income is “effectively connected with the conduct of a trade or business within the United States,” then it qualifies for the deduction.


If you believe they are wrong, why does it matter what their opinion is? Take the position on the returns you prepare consistent with what you believe available guidance states.
~Captcook
 

#14
makbo  
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CaptCook wrote:Take the position on the returns you prepare [involving QBI]

The first one of which, for almost everyone, would be, what, five months from now? We still have time for Spidell and everyone else to edit their blogs, don't we? QBI is one area of which I am very happy to let others engage on the bleeding edge.
 

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We do a lot of tax planning Nov - Dec regarding S-corps and their shareholders, it would be really good for me personally, to be able to pin down 2018 tax liability by then.

Of course need to survive 9/15 first.
 

#16
dave829  
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CaptCook wrote:If you believe they are wrong, why does it matter what their opinion is?

Because Spidell's opinion is important to most of the tax practitioners in California, so when they're wrong, it's a big deal.
 

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dave829 wrote:
CaptCook wrote:If you believe they are wrong, why does it matter what their opinion is?

Because Spidell's opinion is important to most of the tax practitioners in California, so when they're wrong, it's a big deal.


Their opinion is not authoritative at all. There is a matter of fact here. Are they wrong in their interpretation or not?

If you believe they are wrong, advise your clients differently. If you believe they are correct, then advise your clients consistent with their interpretation. Regardless of their interpretation, you have the responsibility to advise your clients in the way you believe the authoritative guidance suggests. Spidell bears no consequence either way in any return you file.
~Captcook
 

#18
dave829  
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CaptCook, I know that their opinion isn't authoritative. I also know that I have the responsibility to advise my clients based on authoritative guidance, which I will do of course.

Since you're not in California, I can understand your lack of knowledge of Spidell Publishing. They teach tax seminars all year long to thousands of tax practitioners in California, culminating in the largest annual federal and state tax update seminar in the state. They are not just "one person's opinion." They have a huge impact on tax practitioners in this state.
 

#19
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If Spidell teaches other practitioners an incorrect reading of the regulations, it sounds like you would have a competitive advantage over other practitioners.
 

#20
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Spidell just issued a correction
Clarification on §199A deduction: rental income (08-09-18)
We would like to issue a correction to the information from yesterday's Flash E-mail regarding Schedule E rental income.
• Schedule E rental income will not qualify for the IRC §199A deduction except in the case of property rented to a related trade or business under common control (the self-rental rules), or if the rental activity fits the definition of "trade or business" under IRC §162 and its regulations.
 

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