199A aggregation for Rental Properties

For clients that have several rental properties, whether it be schedule E 100% owned properties, or majority owned LLC's, does anyone have a sense on whether aggregation is allowed for the 20% deduction?

From CPE's and discussion with other professionals, we are comfortable that having a few rental properties or more should qualify you for the 20% as long as there is some involvement in the management of it, where as having just one might be aggressive.

For aggregation, I'm hung up on the proposed reg 1.199A-4(b)(1)(v), where you have to satisfy two of the three factors below:

(A) The trades or businesses provide products and services that are the same or customarily offered together.

(B) The trades or businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.

(C) The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group (for example, supply chain interdependencies).

I think this would meet the test for A, but what about B or C? Does being the 100% owner and being the person managing the property meet the test for B?

It's much clearer now: real estate rentals aren't 199A. They're 212. Maybe a RE Pro can turn them into businesses....and if so, yes, you'd aggregate.

Don’t conflate multiple rentals with multiple trades/businesses. If you’re taking the position that multiple rentals (i.e. activities) constitute a single business, then there are not multiple businesses to aggregate. There are multiple rentals that we aggregate for making the Sec 162 determination, but that determination leads to a single business [which now qualifies us for Sec 199A]. So there are not multiple businesses to which the 199A aggregation rules apply, meaning your focus on those rules is misplaced, IMO.

In response to JR1, it is my understanding that you don't need to be a RE Pro to qualify for 199A for rental activities. The tests to avoid passive treatment are more substantial than the 199A rules to be considered a business activity. Just because you spend a majority of your working hours outside of real estate, doesn't mean that your real estate activity isn't a business activity for 199A.

Jeff, I understand what your saying, that the rules for aggregation apply for different businesses, not when you have the multiple instances of the same business.

In my case, we have some clients that, while they are not real estate pros, have dozens of rental properties that when netted together have substantial taxable income each year, so aggregating them all can mean that the 2.5% of basis of all the depreciable property in all the properties will easily qualify him for the full 20% QBI deduction, so aggregation matters. For most of the smaller real estate investors it matters less or not at all, since depreciation normally wipes out taxable income on most rental properties.

Thanks!

Correct, good Dr. 212 is the presumption. Burden is on the taxpayer that it's a trade/biz....so you have to leap those rules. We've got a rather long thread that covers that.

I've must've missed something along the way. Is there a discussion that relates Section 121 with Section 199A? I don't understand the connection/reference.
*edit after JR's edit*

I thought the rental activity and 199A was going to be clarified by the IRS in their December, 2018 update for us, and I have not seen anything released that has given us any further direction on that issue.. Did I miss it?

Just did the AES seminar by U of Denver here in Chicago....apparently they have some clarity and there won't be any further clarifications from IRS or Congress....real estate rentals are not included in 199A...unless you make them trade or biz. perhaps I quoted the wrong section...but rentals are investment property/212...again, unless....

CaptCook, JR is talking about 212 not 121; just mixed up the numbers.

JR1, §121 is the 250k/500k home sale exclusion.

THAT makes sense. Thanks, donut!

Fixed! Thanks!

How about a real example? (does rental qualify for QBID) And I have a bunch of these, as a result of the real estate crisis in Fla not so many years ago......

Tp and Spouse lived in their home for a number of years, paid their mortgage, went to work each day. Home became too small, a couple of kids along the way. Tp and Spouse needed a bigger home but were under water, so they purchased a new residence and rented out the original home, still renting the original home, making a nice profit as rents have risen, haven't decided to sell, keep renting it out, a good tenant. Does this family qualify for QBID? (forget about any other income related issues, etc).

ty

"Does this family qualify for QBID? (forget about any other income related issues, etc).
"

Does this help: Fom IRS webinar today on 199A deduction, rental income QBI if rental rises to level of 162 trade or business.
In general, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity
and the primary purpose for engaging in the activity must be for income or profit.
• For interests owned in a pass-through entity, the trade or business determination is made at the entity level.

From IRS webinar today on 199A deduction, rental income [is] QBI if rental rises to level of 162 trade or business.

Seems to me that anything that threatens to send us down the "trade or business" Rabbit Hole again, looking for a definition of "trade or business," is little more than just another encounter with the government's conspiracy never to provide us - the taxpayers and the tax preparation industry - with a working and workable definition of the term "trade or business."

We have already, over the years, discussed this issue at great length in this forum.

Likely, the best answer you'll be able to find is that a "trade or business" is determined by applying a "facts and circumstance" analysis to whatever your situation happens to be.

Bob, NO. They don't. It's mere rental real estate and not up for 199A. I can't even imagine someone successfully turning one single family residence into a trade or biz. And is there even profit? Others may disagree.

There's a lot of case law that says that rentals can be t/b even when taxpayer is passive. The taxpayer's agents count in evaluating whether it is a t/b, so the property manager's activity counts. If the care of the property falls to the tenant (triple net lease), then property is held for investment.

Or so said Gary McBride in last week's webcast. It makes sense to me, and that is how I am going to handle it, unless the IRS issues something definitive saying otherwise. Also, this is consistent with the proposed regs example with the rental of the parking lot to the airport. I would rather explain to a client why the deduction was later disallowed, that I was taking the best position for him based upon the law as it existed at the time, than to explain why I did not take an allowable deduction.

http://www.mntaxclass.com/files/RRETOB_Part_II.pdf

http://www.mntaxclass.com/files/RRETOB_Part_I.pdf

I can't believe I'm saying this since it usually applies to me...but you may want to carefully review the preparer penalties for 199A before you go bold.

3 member LLC owns real estate. LLC rents that real estate to an S Corporation, same 3 members of LLC are also the 3 shareholders of S Corp. Surely the rental income on the respective LLC K-1's qualifies for 199A ? We deliberately raised the rent, and reduced salaries, this year because of the 199A deduction.

3 member LLC owns real estate. LLC rents that real estate to an S Corporation

Where's the trade or business?

If 212 property is not held "for the production of income" (most single rentals), you have a not-for-profit activity. Income to be reported on Line 21 and no deductions because 2% misc itemized ded's are gone ??

Talk about clarity !