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If you handle multiple rental properties, you may find Section 199A quite confusing. Let’s take a good look at the issues involved. Then we will consider how they affect you and provide actions you can take.

Taking a Look at the Big Picture

There are several things you will need to consider if you have multiple rental activities, including:

  • Are your rental activities a single trade or business, or are they multiple trades or businesses?
  • Can you, and do you want to aggregate your rentals for the Section 199A deductible?
  • If you choose to use the Section 199A deduction, how will it affect your 199A safe harbor?
  • What if you grouped rental activities under the Section 469 tax code using passive-loss rules? Will it affect your 199A?
rental real estate property and the 199A deductible

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How Many Trades or Businesses?

Each situation is unique when it comes to whether your rental activities are each a business or trade, or they comprise one business or trade. The IRS doesn’t consider multiple businesses or trades as a single entity unless different accounting methods are used for each trade or business per the regulations set forth in Section 466. Additionally, these regulations require maintaining separate sets of records and books to distinguish each trade or business,

How you have set this up is a huge determining factor if an individual rental activity doesn’t equate to a business or trade, but your collective rental activities do.  The IRS will look at factors like this to determine if a rental activity is a single business or trade, or if it is the total number of rented properties.

Aggregating Multiple Trades or Businesses

Regulations within Section 199A allow the aggregation of multiple trades and businesses. This lets you treat an aggregated group as a single business or trade when considering your Section 199A deduction. This can also be important if one (or more) of your rental trades are UBIA (Unadjusted Basis in Assets) or has insufficient wages to allow for the maximum deduction provided in Section 199A. If you choose to aggregate, your activities have to meet these five requirements:

  1. One person or group must own 50% or more of each business or trade.
  2. The ownership has to be intact for most of the taxable year, including the final day of the taxable year.
  3. All items attributed to each business or trade must be reported on returns in the same taxable year. (Without accounting for short taxable years.)
  4. Businesses or trades cannot include any opt-of-favor service trades or businesses.
  5. The businesses or trades have to satisfy at least two of the three circumstances and facts listed below.

Facts and Circumstances:

  1. The business or trade must provide services, property, or products typically offered together, or that are the same.
  2. Businesses or trades share significant centralized business elements such as IT resources, human resources, manufacturing, purchasing, legal, personnel, or accounting.
  3. The operation of the businesses or trades relies on or operates in coordination with one or more of the businesses in the group being aggregated. (One example is a supply chain interdependency)

Can You Aggregate Multiple Rental Trades or Businesses?

In most circumstances, you can aggregate multiple rental businesses. However, they must share centralized administrative functions like legal, human resources, and accounting functions. However, the type of rental business could pose a problem. For instance, you cannot typically aggregate commercial rental businesses with residential rental businesses since they are not the same types of properties.

Also note, for rental businesses that qualify for the 199A tax deduction according to the commonly controlled rental rule, cannot be aggregated with other rentals as long as it is still considered to be an “out-of-favor” service business or trade.

tax paperwork and businessmen

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Rental Safe Harbor and the 199A Deductible

The IRS has offered a safe harbor option to claim your rental activities under the deduction provided under Section 199A. For safe harbor purposes only, you can arrange rental activities into RREEs (rental real estate enterprises) to determine if they meet the 250-hour requirement or not. By arranging rental properties in the safe harbor helps determine whether they qualify for the Section 199A deductible. It does not impact how many rental property businesses or trades you have on other Section 199A provisions.

The Section 469 Grouping

You also have an option to group rental activities under the Section 469 tax code. This allows you to group them as one activity under passive loss rules. One reason you may opt to take this route is because the combined activities more easily meet the “material participation” standard than each one individually. Of course, the Section 469 grouping only applies to Section 469 rental properties businesses, and trades. It has no bearing on Section 199A.