As always, with emails like this, please consult a CPA or Tax-Attorney on all of these types of emails.
I am not a CPA and this should only be considered informational.
Okay.
Here's another technical one. I've gotten feedback from some of you that you appreciate the technical emails, so here you go. If this is more than you want to read, but want to know how it affects your business, give us a call or shoot an email. I'd be glad to set up a time to discuss.
If you use triple-net leases for your rental properties, you may wonder whether you’ll get your Section 199A deduction.
A triple-net lease requires the lessee to pay the landlord rent as well as take care of real estate taxes, building insurance, and property maintenance costs. Therefore, in a triple-net lease, the lessee bears all the burdens of ownership, and the landlord usually has little to no involvement in the property management.
A rental property qualifies for the Section 199A deduction if
the rental property qualifies as a trade or business under tax code Section 162, or
you rent the property to a commonly controlled trade or business.
Assuming you can’t use the commonly controlled route, your rental properties need to rise to the level of a trade or business to get your Section 199A deduction.
To meet that requirement, you’ll generally need to have regular and continuous involvement with your rental activities. And the proposed regulations require you to look at each rental activity separately when determining whether it is a trade or business—aggregation doesn’t help you with this.
Many triple-net lease rental activities likely fail the regular and continuous activity test and won’t qualify for the Section 199A deduction. For example, in Neill, the Board of Tax Appeals (the precursor to the Tax Court) held that a single property leased on a triple-net basis is not a Code Section 162 trade or business.
In the preamble to the Code Section 1411 regulations, the IRS gives you other factors to consider when determining whether your rental activity is a trade or business:
Type of property (commercial vs. residential vs. personal property)
Number of properties rented
Day-to-day involvement of the owner or its agent
Type of lease (net vs. traditional, short-term vs. long-term)
Based on the most recent guidance from the IRS, triple-net-leases do not rise to the level of active business activity and do not qualify for the deduction. No matter how many are in your portfolio. Now that we have that clarification, we're working with clients to analyze other planning opportunities to take advantage of the 199a deduction or the new lower corporate tax rates.