A Win for Rental Real Estate – Section 199A Deduction Safe Harbor

(An explanation of IRS Notice 2019-07)

This month as final regulations were issued under Internal Revenue Code Section §199A, the IRS also issued a proposed revenue procedure that provides a “safe harbor” method of treating certain rental activity as a trade or business for purposes of §199A. Notice 2019-07 comes as a relief to many taxpayers who own real estate and were questioning whether they could benefit from the Section 199A deduction this tax season.


Section §199A of the Internal Revenue Code was created in December 2017 with the passage of the Tax Cuts and Jobs Act. It provides a 20% deduction of certain “trade or business” income earned by sole proprietors and owners of pass-through entities. From day one, a primary frustration with Sec. 199A has been its silence and ambiguity regarding whether rental activity qualifies for this deduction.

In August of 2018, Proposed Regulations were released to provide more details regarding 199A. While many questions were answered, guidance on the rental question remained ambiguous, consisting in part of the chiding that some rental activities do not “rise to the level” of a trade or business (and the implied concession that some do).

Final regulations issued this month do not add much clarity to the Proposed Regulations as they relate to rental property, but with the issuance of Notice 2019-07, the IRS has provided a well-defined path out of the haze for some taxpayers.

Notice 2019-07: The safe harbor

First, let’s understand the significance of this notice, and its placement in related guidance. The Tax Cuts and Jobs Act housed the 20% deduction we are discussing in Internal Revenue Code (Section 199A) – the highest source of U.S. tax authority. At Congressional direction, the IRS supplemented the Code with Treasury Regulations – the second highest source of authority. Revenue Procedures may be considered a notch below Treasury Regulations, but are still primary authority. An IRS notice serves as formal announcement of pending IRS action – in this case that a yet-to-be indexed Revenue Procedure containing the provisions of Notice 2019-07 is on the way. In short, we can rely on its guidance.

Now let’s understand what the safe harbor itself is, and what it isn’t: Its use is not mandatory, and it does not represent the only way for rental property to qualify for the 199A deduction. Those who fail its criteria or choose not to bother with its record-keeping requirements still have the option of reviewing the Section 162 trade or business definition and aggregation rules under Regulations §1.199A-1 and §1.199A-4 to see if they qualify. Those rules are complex and subjective, though, while Notice 2019-07’s criteria is simple and objective.

Not everyone can use the safe harbor. Real estate used by the taxpayer (including an owner or beneficiary of a pass-through entity relying on this safe harbor) as a residence for any part of the year under section 280A (i.e. Airbnb) and real estate rented or leased under a triple net lease are not eligible for this safe harbor.

Qualification under the safe harbor does not automatically bestow a 20% deduction on the property’s owner. As explained in other BNN articles, Sec. 199A contains a number of complex calculations that still must be dealt with, and the safe harbor merely provides a path to enter that gauntlet.

A rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties. The individual or relevant pass-through entity (partnerships, S corporations, trusts and estates) relying on this revenue procedure must hold the interest directly or through an entity disregarded as an entity separate from its owner under §301.7701-3. Taxpayers must either treat each property held for the production of rents as a separate enterprise or treat all similar properties held for the production of rents as a single enterprise. Commercial and residential real estate may not be part of the same enterprise. Taxpayers may not vary this treatment from year-to-year unless there has been a significant change in facts and circumstances.

The safe harbor method imposes three requirements that must be satisfied during a taxable year for a real estate enterprise to qualify as a trade or business:

  1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
  2. For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed (as described in the notice, and listed below) per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed annually; and
  3. The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS.

Fortunately, the IRS is not applying the contemporaneous records requirement to taxable years beginning prior to January 1, 2019. Taxpayers should start maintaining these records now for the 2019 tax year.

Note that the 250 hour test described above does not ask whether a particular owner incurred that many hours; it instead asks whether the rental endeavor itself  required 250 hours of time – hours incurred by any number of individuals.  Rental services (for purposes of the 250 hour requirement) may be performed by owners or by employees, agents, and/or independent contractors of the owners and include the following:

  1. Advertising to rent or lease the real estate;
  2. Negotiating and executing leases;
  3. Verifying information contained in prospective tenant applications;
  4. Collection of rent;
  5. Daily operation, maintenance, and repair of the property;
  6. Management of the real estate;
  7. Purchase of materials; and
  8. Supervision of employees and independent contractors.

The term rental services does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.

To qualify under the safe harbor the taxpayer or pass-through entity must include a signed statement in the return for each property on which it claims the section 199A deduction or passes through section 199A information. The statement should indicate that the requirements of these rules have been satisfied. The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the statement.


Notice 2019-07 will not cause every rental property to qualify for Sec. 199A’s 20% deduction, but it provides, for the first time, an objective method (to accompany existing subjective methods) for certain taxpayers to qualify for this benefit. Taxpayers who believe they will qualify should become familiar with these rules, and pay special attention to the contemporaneous record-keeping requirements that apply beginning in 2019.

For more information or a discussion on how this may impact you, please contact your BNN tax advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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