The IRS has proposed new regulations for Section 199A that define the Specified Service Trade of Business. However, in the lengthy package, there is something missing: real estate rental properties. The regulations did not qualify when a real estate rental property is considered a trade of business. The industry is left to wait for guidance on the issue, hoping for a standardized set of rules that apply to all investor types. Currently, previous court decisions are moonlighting as regulatory guidance, and will continue to do so until the IRS has more definitive regulations.
“Real estate is a subjective test whether you are in a trade of business or not. Historically, from a tax law perspective, there are several court cases to demonstrate whether you were in a trade of business or not, and I really think the Treasury is struggling to address real estate as a trade of business when there are some contradictory court cases,” Richard Gabaldon, tax partner at RSM, tells GlobeSt.com. “I believe that is why we didn't see anything in the proposed regulations; however, we do expect more guidance. That is what we are waiting for.”
One of the issues in developing guidance is the subjective nature of real estate rental businesses and the vast differences between operators—from owners with single rental income assets to corporate owners with thousands of assets. “This is a subjective test, and you have to look at the unique circumstances within each business,” Gabaldon says. “The ideal situation would apply to all real estate investors, but you would have to circumstances check over the specific situation. There is no current test, and that is what we are waiting for. It is going to be interesting to see what the Treasury ultimately comes up with.”
Gabaldon says that the regulations—when they do come—will likely focus on private owners, rather than REITs, which have already been given criteria in the new tax package. “I would hope that they would carve out criteria that would address all industries. I think there should be a criteria that would apply broadly to all types of investors, whether you own one property or a thousand properties,” he explains. “REITs, though, are a corporation, and there are special rules as it relates to REITs. The current administration specially carved out the REIT industry in the new tax reform legislation and has given a 20% reduction of dividends received from a REIT. I don't think they are battling the same battle. The tax group from 199A is really for small investors or large real estate companies.”
There is no specific timeline on when guidance will come, and Gabaldon doesn't expect anything soon. “The Treasury has been very slow and has missed their own internal guidelines,” he explains.
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Kelsi Maree Borland
