2B — January 31 - February 13, 2020 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
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O wners , D evelopers & M anagers
he Tax Cuts and Jobs Act of 2017 (TCJA) was a major overhaul By Ashley Kettler, CPA, Withum REITs come out ahead in light of TCJA T
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ness under Section 162, which does not provide an explicit definition of what it means to be a trade or business. Further- more, under the final Section 199A regulations, the Treasury declined to provide a bright line test for whether a rental real estate activity is considered a trade or business. The Treasury did, however, provide a safe harbor for qualifying rental real estate activities as a trade or business. Unfortunately, Revenue Procedure 2019-38 excludes owners of triple net lease property from using the safe harbor. The revenue pro- cedure indicates that “a triple net lease includes a lease agree- ment that requires the tenant or lessee to pay taxes, fees, and insurance, and to pay for maintenance activities for a property in addition to rent and utilities.” As a result, triple net lease property is not eligible for the QBI deduction, since it is not deemed a trade or business. On the flip side, a REIT may own a triple net lease property and the qualified dividends from that REIT are still eligible for the 20%
Owners, Developers &Managers QBI deduction. In essence, taxpayers can get around this limitation on triple net lease property by holding it through a REIT. In addition, the 20% continued on page 16B
of the tax law. R e a l e s -
t a t e b u s i - nesses were significantly impacted as a result of the changes. For the most part, the new rules mean a posi- tive outcome for REITs. Section 199A – QBI deduction Section 199A entitles eli- gible taxpayers to deduct 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income. The term “qualified REIT divi- dends” does not include capital gain dividends. In addition, Section 199A allows eligible taxpayers to deduct up to 20% of their quali- fied business income (QBI) from a domestic business, such as a partnership, sole proprietor- ship, S Corporation, trust, or estate. In order to take the 20% QBI deduction, income must be from a qualified trade or busi- Ashley Kettler
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