What You Need to Know: Self-Rentals and Negative Tax Capital Accounts
Published on by Laura Hunter in Consulting, Real Estate, Tax Services
This blog is part of an ongoing series highlighting tips and strategies that could help you benefit from or better manage your real estate interests. Be sure to check back to our Real Estate blog frequently to learn more.
Did you Know: Self-Rentals
Did you know that rental income to a commonly controlled (owned) individual or pass-through entity qualifies as a trade or business? It’s common practice for business owners to own real estate in a separate entity from the business operations. The rental income from a commonly controlled non-service business, is a qualifying trade or business, eligible for the new 20% Qualified Business Income Deduction. Additionally, self-rental income is not subject to the 3.8% Net Investment Income Tax. This allows business owners to have the best of both worlds – liability protection for their property and a tax benefit!
Rental income NOT from self-rentals, must qualify as a trade or business under the stringent safe harbor rules, detailed in Notice 2019-07.
Did you Know: Negative Tax Capital Accounts
Did you know that the IRS requires a partnership to report if any partners have a negative tax capital account? If a partnership reports other than tax basis capital accounts to its partners on Schedule K-1, and the tax basis capital, at the beginning OR end of the tax year would be negative, the partnership must report on line 20 of Schedule K-1, using code AH, for tax years beginning after December 31, 2017.
In the real estate world, it’s not uncommon for businesses to finance using loans and have sizable depreciation deductions, causing a negative tax capital account. Failure to report will result in penalty assessments. However, given the reporting complexity, the IRS has issued Notice 2019-20, which provides for penalty relief for failure to comply with this new reporting requirement in a timely fashion. The penalty relief will allow additional time for partnerships to provide the negative tax basis capital account information. Note that the relief is only available for a partnership’s taxable year beginning after December 31, 2017, but before January 1, 2019.
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