Tax Win: IRS Provides Clear Test on How 20% Deduction Applies to Rental Income, Exchanges

The Internal Revenue Service has issued final rules on the 20 percent business income deduction (Sec. 199A of the Tax Code) that was enacted in late 2017 as part of the Tax Cuts and Jobs Act.

Eligibility of rental income

If you generate rental property income, that income can also qualify for the new deduction, as long as you can show that your rental operation is part of a trade or business. The IRS has released proposed guidelines that include a bright-line test, or safe harbor, for showing that your rental income rises to the level of a trade or business. Under that safe harbor, you can claim the deduction if your rental activities—which include maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities—total at least 250 hours a year. If your activity totals less than that, you can still try to take the deduction, but you'll have to be prepared to show the IRS that your activity is part of a trade or business.

Eligibility of 1031 like-kind exchanges

Under earlier proposed regulations, if your income was above threshold levels set in the tax law—$157,500 for single filers, $315,000, for joint filers—and you had exchanged one property for another to defer taxes under Sec. 1031 of the tax code, the amount of the new deduction might be reduced because of the swap. The National Association of REALTORS® (NAR) and other trade groups reached out to the IRS to change this treatment, and the IRS has made that change. Under the final rules, you can use the un-adjusted basis of the depreciable portion of the property to claim at least a partial deduction.

"The final rules are the result of several months of advocacy and collaboration between NAR, our members, and the administration," says NAR President John Smaby. "They reflect many changes that NAR sought to ensure the new 20 percent deduction applies as broadly as possible."

Additional information

IRS announcement

Summary in The Voice for Real Estate video

Have more questions? Want to find a new Tahoe home?

  1. Sign up for an email notification so you’ll know the minute a home is listed.
  2. Call us directly at 530-541-2465 or stop by our office and we’ll sit down and explore all options.
  3. Get our newsletter every other month which gives you an insight into Lake Tahoe real estate.
  4. Search all homes for sale around the lake.  Our website makes it easy to search for homes that match your criteria.
  5. Get valuable and current information when you sign up to receive Lake Tahoe real estate articles sent to your inbox.