The Tax Cuts and Jobs Act (TCJA) makes keeping a log of your professional real estate activities more important than ever. Section 199A of the TCJA provides a deduction related to revenue earned from certain rental real estate activities. Final section 199A regulations provide a safe harbor for qualified rental real estate activities. This safe harbor requires rental real estate professionals to contemporaneously track the time spent by rental real estate professionals on rental real estate activities. The sample log can be used to identify activities that qualify for the TCJA section 199A safe harbor for rental real estate activities.
The TCJA has not changed any of the requirements under section 469 for material participation in a rental real estate activity. The main difference between section 199A and section 469 is that, under section 199A, time spent on financial activity such as procuring insurance does not qualify for the safe harbor; whereas the time spent procuring insurance will qualify as material participation under section 469.
Like section 199A, section 469 compels real estate professionals to maintain a log of their real estate activities. The treatment of a taxpayer's losses from rental real estate may be treated as passive or nonpassive, depending on the taxpayer's level of participation. Because losses from passive activities cannot be used to offset nonpassive income, taxpayers generally are interested in maximizing the number of business activities that qualify as nonpassive — that is, activities in which the taxpayer materially participates.
While there are several tests that must be met to treat losses from rental real estate as nonpassive, we offer a sample log designed to help taxpayers track whether or not they have met the hours tests for the participation classifications. The sample log includes a contemporaneous calendar to track daily hours by activity as well as recommended documentation to support the activity.
Detailed, contemporaneous documentation of time devoted to each activity is necessary to support a taxpayer's position for treatment of rental real estate activity losses. Without this documentation, the IRS may not accept documentation created upon inquiry. Please consult your tax advisor regarding your specific facts and circumstances to determine the proper treatment of your rental real estate activity losses.
|Material participation hours threshold:||500 hours - rental|
|Real estate professional hours threshold:||750 hours and > 50% of total hours - real property trade or business|
|Examples of qualifying services performed||Examples of support for qualifying services performed|
|Participated in the process of negotiating lease terms with prospective tenant(s)||Contemporaneously maintained Outlook or other calendar; LOI for lease, copies of executed leases|
|Review proposals and contracts for building services||Contemporaneously maintained Outlook or other calendar; proposals and contracts; email and other communications regarding the same|
|Negotiated terms related to obtaining financing for retail real estate project||Contemporaneously maintained Outlook or other calendar; lease term sheets, copies of executed loan documents|
|Analyzed and prepared financial data related to rental real estate acquisitions and dispositions||Contemporaneously maintained Outlook or other calendar; due diligence materials, purchase and sale agreements, business models, business plans|
We cannot overstate the importance of maintaining a contemporaneous record of time spent on all business activities. Reliance on after-the-fact documentation in an audit almost inevitably results in significant disallowed losses and additional tax liabilities.
If you have questions or would like more information on this topic, please contact a member of your Baker Tilly service team or email our tax team at email@example.com.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.