Real estate investors have a host of concerns to manage, not least of which are taxes and IRS compliance. For small business owners or individual investors, Section 199A of the tax code offers an excellent opportunity to reduce taxable income, potentially keeping more of your earnings in your pocket. Understanding whether your real estate activities qualify for this deduction can be the key to unlocking valuable tax savings.
What Is Section 199A?
Section 199A, introduced as part of the Tax Cuts and Jobs Act, allows eligible pass-through entities, like sole proprietorships, partnerships, and S corporations, to deduct up to 20% of their qualified business income (QBI). Individual investors in real estate may also qualify if their activities meet specific criteria. This deduction was designed to provide tax relief to small business owners, including those in real estate, by lowering their taxable income.
Does Your Real Estate Activity Qualify?
Not all real estate investment activities automatically qualify for the Section 199A deduction. To benefit, the IRS requires that your activity rises to the level of a trade or business under Section 162 of the Internal Revenue Code.
For rental property owners, the IRS provides a safe harbor rule that defines specific conditions under which real estate activity qualifies as a trade or business:
- Separate Books and Records: Maintain distinct documentation for each property or a combined real estate enterprise.
- 250 Hours of Service: Perform at least 250 hours of rental services annually. These can include tasks like maintenance, tenant communication, and administrative duties.
- Detailed Records: Keep contemporaneous logs of all work performed, including dates, hours, and the nature of the activity.
Even without meeting the safe harbor requirements, you may still qualify if your activity demonstrates sufficient regularity and involvement. Consulting a CPA is essential to understanding where you stand.
Income Limits and Exclusions
Eligibility for the full deduction depends on your taxable income. For 2024, the deduction phases out for single filers with taxable income above $241,950 and joint filers above $483,900.
It's important to note that income earned through a C corporation or wages from employment are not eligible for the deduction, even if tied to real estate activities. However, there may still be strategies to optimize your tax position if your income exceeds the threshold, such as re-evaluating how your business is structured.
Why Documentation Is Crucial
Proper recordkeeping is more than just helpful; it's critical for claiming the Section 199A deduction. Maintaining accurate and detailed financial records can make or break your eligibility.
Here's how to stay organized:
- Track all income and expenses for each property using reliable accounting software.
- Maintain logs of all rental services performed, including hours worked and tasks completed.
- Save receipts, invoices, and contracts for property-related expenses.
These steps will help support your claim and prepare you for any potential IRS inquiries.
How a CPA Can Help You Navigate Section 199A
Managing the complexities of Section 199A is no small task, especially for individual investors managing multiple properties. A CPA can help you:
- Determine whether your real estate activities qualify as a trade or business.
- Identify strategies to maximize your deduction, such as meeting safe harbor requirements or adjusting your business structure.
- Address limitations tied to income thresholds and ensure compliance with all IRS regulations.
For real estate investors, the potential savings make consulting with a professional well worth the effort.
Optimize Your Tax Strategy
As the year progresses, taking proactive steps to understand and apply the Section 199A deduction can make a major difference in your tax bill. Whether you're a small business owner or an individual real estate investor, understanding this provision can help you retain more of your hard-earned income.
At Myrick CPA, we're here to help you understand the tax code while devising a tax strategy customized to your unique circumstances. Contact us to schedule a consultation and learn more about how Section 199A can work for you.
