Guidance offered in September 2019, though, clarified that the 199A treatment indeed extends a safe harbor provision for some, but not all, interests in rental real estate, enabling them to be treated as a “trade or business”. Unfortunately, there remain a number of cases in which the various ‘triers of fact’ – first, the taxpayer, then the IRS, and finally the courts – will have to consider the taxpayer’s unique ‘facts and circumstances’ in determining whether the taxpayer’s activities rise to the level of a trade or business.” “In most situations, neither the taxpayer nor the IRS should find it difficult to evaluate the trade or business status of the taxpayer’s activities – the level and quality of the activity will be such that its status will be obvious. “In general, courts have held that in order for a taxpayer’s activity to rise to the level of constituting a trade or business, the taxpayer must satisfy two requirements: (1) regular and continuous conduct of the activity, which depends on the extent of the taxpayer’s activities and (2) a primary purpose to earn a profit, which depends on the taxpayer’s state of mind and their having a good faith intention to make a profit from the activity,” according to lawyer Lou Vlahos of Long Island-based Farrell Frit z. Some case law, though, was on the investors’ side. The fact that engineering, architecture and investment management services were singled out as specifically not qualified had many real estate investors anxious. And, while the term “qualified trade or business” was defined under the statute, it remained unclear if real estate management services were included.

While the 2017 tax law includes REIT dividends in the definition, it remained silent on the treatment of real estate rental income not connected to these trusts. This applies to the Tax Cuts and Jobs Act because its definition of “qualified business income” is comprised in part by the taxpayer’s receipts from a “trade or business”.

For example, it can help define was does or doesn’t constitute “recklessness,” as in reckless driving or reckless endangerment. It’s not safe to assume that we all have the same understanding of what’s meant by “safe harbor,” so maybe that should be our jumping-off point.Ī safe harbor is a provision in law or regulation that specifies actions that are deemed not to violate a given rule, typically one that was vaguely worded. What, then is the effect of this particular rule on the closely held firm? And, from Sharestates investors’ perspective, how might it benefit the commercial real estate industry? After all, it’s a general provision, not specific to building and operating rental properties. The knock on the 2017 tax reform package has been, with some justification, that it benefits corporate businesses greatly but not so much individual taxpayers. Clarity came this past September, when the Internal Revenue Service offered its guidance, including a safe harbor provision for rental properties. How a business might qualify for this exemption off a business’s net profit, though, was not clearly defined when the law passed.

One underreported codicil of 2017’s Tax Cuts and Jobs Act is a 20% pass-through deduction under its section 199A. “A ship in harbor is safe, but that is not what ships are built for.” - John A.

Safe harbor definition