The IRS today released an advance version of Rev. Proc. 2019-38 to provide a “safe harbor” under which a rental real estate enterprise will be treated as a trade or business for purposes of section 199A and Reg. sections 1.199A-1 through 1.199A-6.
The safe harbor provided by Rev. Proc. 2019-38 applies solely for purposes of section 199A. If an enterprise fails to satisfy the requirements of this safe harbor, it nevertheless may be treated as a trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in Reg. section 1.199A-1(b)(14).
In January 2019, when regulations under section 199A were released, the IRS and Treasury Department were aware that there was uncertainty whether an interest in rental real estate rises to the level of a trade or business for purposes of section 199A. To address this uncertainty, the IRS also released Notice 2019-07 as a proposed version of a revenue procedure that included a safe harbor treating a rental real estate enterprise as a trade or business solely for purposes of section 199A.
Today’s revenue procedure was issued after the IRS and Treasury considered the comments received with regard to Notice 2019-07.
Today’s revenue procedure sets forth the safe harbor and the procedural requirements for using it. “Relevant passthrough entities” (RPEs) may also use the safe harbor.
To use the safe harbor, taxpayers and RPEs must satisfy all of the requirements of Rev. Proc. 2019-38. As noted above, a failure to satisfy the requirements of the safe harbor does not preclude a taxpayer or the IRS from otherwise establishing that an interest in rental real estate is a trade or business for purposes of section 199A.
Rev. Proc. 2019-38 applies to tax years ending after December 31, 2017.
Taxpayers and RPEs may rely on the safe harbor set forth in Notice 2019-07 for the 2018 tax year.
The contemporaneous records requirement will not apply to tax years beginning before January 1, 2020. However, the IRS has reminded taxpayers that they bear the burden of showing the right to any claimed deductions in all tax years.
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