Section 199A in Real Estate Transactions: Taking Advantage of the Qualified Business Income Deduction

Description

One of the most significant features of the 2017 tax reform is the new 20% deduction available to non-corporate taxpayers for their QBI. As pass-through entities are typically the vehicles of choice for real estate transactions in the U.S., the QBI deduction as codified under IRC 199A represents a real opportunity for the industry.

Section 199A generally limits the deduction attributable to a pass-through business to the greater of: (1) 50% of the individual's W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such W-2 wages plus 2.5% of the tax basis immediately after its acquisition of the business' qualified property.

Rental income must be "effectively connected" with a U.S. trade or business as defined in IRC 864(c). Whether or not income such as rent is "effectively connected" depends on whether the income derives from assets used in the business (asset use test) and whether the activities of the business are a material factor in realizing the income (business activities test).

Real estate counsel must have a thorough understanding of 199A and its limitations when advising on entity structures and operations. Determination of a real estate entity's eligibility for the deduction, and any actions needed to maximize the deduction should be made at the deal structuring stage.

Listen as our panel analyzes the potential tax benefits and limitations of 199A in real estate transactions and outlines tax planning strategies to take advantage of the QBI deductions for real estate owner-operators.