ection 199A introduced a new 20% deduction for qualified business income (previously discussed here). To qualify for the deduction, income must be from a trade or business. Many senior living communities hold their real property in a separate entity, which is then rented to the operating company. Can this rental activity qualify for the new qualified business income deduction?

Whether rental activity rises to the level of a trade or business can often be a difficult question to answer. In Notice 2019-07 (found here), the IRS announces a safe harbor under which a rental real estate enterprise will constitute trade or business for Section 199A purposes if the enterprise performs 250 or more hours of rental services during the year. Any enterprise wishing to fall within this safe harbor must maintain records such as a time log or calendar documenting the services. If the real estate is rented under a triple net lease, the safe harbor is not available.

The IRS notice provides a helpful safe harbor, but it is important to note that it is only a safe harbor. The fact that a real estate business cannot satisfy the safe harbor does not mean that it might not otherwise qualify as a trade or business for Section 199A purposes.