TaxProTalk.com

For purposes of QBI, can a real estate broker (Sch C) aggregate that business with their many rental properties (Sch E) that they own.

I do not believe these meet 2 of the 3 tests in Reg §1.199A-4(b)(1)(v)

(v) The trades or businesses to be aggregated satisfy at least two of the following factors (based on all of the facts and circumstances):
(A) The trades or businesses provide products, property, or 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).

(A) & (C) are a stretch.

Yea a stretch generally but I can see an argument if you could make the facts more unique. Let’s say he specializes in renting some kind of unique type of property. Been doing it for 30 years, buying, selling and renting, and he has specialized knowledge in these types of property. If this is the operators knowledge, and let’s say he provides the knowledge to the sch c activity, from time to time to assist in closings, then that’s a reliance upon, especially if one activity could be identified as the origin of a certain skill or specialized knowledge.

Thank you, Terry.

(C) seems the stronger of the two, particularly for my client, as he is the property manager for his rental properties. Supply chain interdependencies - the rental properties need a property manager to operate.

Supply chain interdependencies - the rental properties need a property manager to operate.

I don’t buy it. You’re inserting the property management aspect after the fact. Even so, if he personally, and directly, owns a rental property, and happens to manage it himelf, how is that multiple activities? There is no income or expense with the property management aspect since he is not paying, and cannot pay, himself…unless there are regarded entities at play. But you said there aren’t.

This guy has a brokerage business, which involves buying and selling real estate, as a commissioned broker (or dealing with leases). The only aspect of that business pertaining to rentals he owns would be to purchase those properties. And I’m not even sure if those were run through the brokerage house (his principal), and hence, his Schedule C. He may have just done it on the side, on his own personal accord. And even if he did run a personal rental purchase through the brokerage house (his principal; effectively earning a commission on a property he bought for himself), I still see no interdependency.

It seems to me that the brokerage business really has nothing to do with his rentals.

I am not following how the method in which he pays or doesn't pay himself for services provided to himself is part of this determination.

I have a taxpayer that owns over 100 rentals and his spouse became a realtor to "save" money on the commissions associated with renting buying and selling rentals in her husband's portfolio. This arrangement happened before TCJA but I aggregated the two with the belief that B and C at the very least was satisfied.

I am not following how he pays or in this case, doesn't pay, himself for the services provided to himself is part of this determination.

If I own a rental personally, and personally manage that rental, I wouldn’t say I have 2 different businesses – one being property management (for which I am not being compensated) and one being real estate rental. I am not in the business of “property management” because I am not deriving any income from my property management services. I am deriving my income from the one business of renting real estate. My Schedule C for my property management business, in this isolated instance, would have all zeros on it. The fact that he manages the rentals himself saves the cost of having to pay someone else. Not having to pay someone else, so as to save money, does not constitute a business. The money saved, by not having to pay labor, simply does not cause Schedule E net income to otherwise be lower. With any business, including a property management business, there is an expectation of profit. There is no property management profit in this instance, nor is there an expectation of one, because there is no property management income or expense. All savings from the self-management accrue to the Schedule E and nothing gets pushed to Schedule C. And if there is no Schedule C from this property management business, there are not two “businesses,” nonetheless two businesses that can be aggregated together.

This arrangement happened before TCJA but I aggregated the two with the belief that B and C at the very least was satisfied.

If you truly aggregated, what you aggregated were the individual rentals into one activity.

While the existing Sch C has zero income related to managing the taxpayer-owned rentals, it does have other income. There is a real Sch C. That other income includes a little bit of property management income from other properties not owned by the taxpayer, but mostly it has commissioned sales & leasing income.

Would you give the green light to the aggregation if the taxpayer's rental properties began paying a real property management fee to the Sch C? Forget about whether this is a good idea or not. I just want to know if, that were the case, you would agree to the aggregation.

There is a real Sch C.

I understand there is a real Sch C. You described it in the OP, however, as a real estate brokerage business. As such, the question you asked in the OP, once we had a few additional facts, came across like this:

Taxpayer has a Schedule C real estate brokerage business. I’d like to aggregate his personal rentals with his property management business.

Say what?

I realize you might be tired…

I just want to know if, that were the case, you would agree to the aggregation.

I might. You’d need a regarded entity somewhere in the mix. And the property management business wouldn’t be an SSTB, so aggregation isn’t totally off the table.

Yes. Still tired, but less cranky. Thanks, Jeff.