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Real estate and the Qualified Income Business Deduction

The Tax Cuts and Jobs Act (TCJA) includes a provision that allows qualifying business owners to take an income deduction (QBID). The vague language and complexity of the 20 percent pass-through deduction continues to cause frustration for business owners. Which business owners can take the deduction? Who cannot? This piece will focus on how this provision of the TCJA impacts those in the real estate business.

SSTB defined: A business or trade that fits the definition of a Specified Service Trade or Business (SSTB) within Section 199A of the TCJA may not qualify for the QBID. Congress essentially defined an SSTB as those that perform services as an employee or fit within a specified service trade or business. Congress drafted the first definition with the intent of reducing the risk an employee would deduct his or her own wages and the second in an attempt to include business owners in this exception.

The language of the law specifically excludes those businesses that work in “health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.”

Real estate market and the QBID: The SSTB provision does not include real estate agents, brokers and property managers. As such, these professions can, in theory, take advantage of the deduction.

Watch out for these potential problems: There are some situations that can result in a reduced deduction. For example, a recent piece by Forbes notes real estate professionals who use an SSTB to lease property or work in collaboration with an SSTB could lose the deduction.

Navigating this section of the TCJA is difficult and a failure to abide by the rules of the new law could result in an audit. Any entrepreneur that faces questions for the IRS is wise to take proactive steps to protect their business interests. The attorneys at Goldburd McCone can help preserve these interests.

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