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Maximizing Aggregation Rule Benefits for Business and Rental Properties

Taxpayers who own business or rental properties will have legitimate questions about the aggregation rules for Section 199A of the Tax Cuts and Jobs Act of 2017. The tax attorneys at Rosenberg Martin & Greenberg LLP in Baltimore note that the IRS did not issue guidance for Section 199A issues until mid-January 2019. Taxpayers are now working to understand that guidance in order to optimize the treatment of their business and rental property revenues and to maximize their deductions in their 2018 returns under the new law and regulations.

Section 199A and Rental Real Estate Businesses

Within certain limitations and income caps, Section 199A allows taxpayers to deduct up to 20% of qualified business income from certain forms of domestic businesses. The IRS issued safe harbor guidance for activities in rental real estate enterprises, which are defined as real property interests that are held for the purpose of generating rents. With Section 199A’s aggregation rules, a taxpayer may be able to consider multiple rental properties to be part of a single trade or business, which can give the taxpayer a significantly larger tax deduction than if each property were treated as a separate entity. The taxpayer, however, must disclose aggregation on an attachment to his or her return, and failure to include that attachment can result in the IRS’s disallowing aggregation and barring the taxpayer from aggregating expenses for three years.

Business and Rental Property Activities That Qualify for Purposes of Section 199A

Because the IRS released its guidance for Section 199A only very recently, some speculation remains as to how business rental activities and real estate investments will be treated under that Section, particularly for aggregation purposes. Taxpayers should understand a few basic guidelines about the rules:

  • Maintain a log that shows the amount of time the taxpayer devoted to property inspections, paying bills, tenant screenings, and managing contractors that perform work on the properties.
  • Taxpayers with fewer business or rental properties will be at a disadvantage when compared to taxpayers that own multiple units and different properties.
  • Triple net leases may be perceived as generating passive income that will not be deemed to be qualified business income for the 20% deduction.

The Section 199A aggregation rules are not in themselves complex, but the myriad different ways in which taxpayers own and manage business and rental properties, including how they record income from those properties, create complexity that can defeat the benefits of the rules.

Connect with the Baltimore Tax Lawyers at Rosenberg Martin Greenberg for Section 199a Assistance

The tax attorneys at Baltimore’s Rosenberg Martin & Greenberg LLP advise businesses and individuals throughout the mid-Atlantic states on how to maximize their deductions for business and rental activities when they file their tax returns for prior years, and on how to structure their businesses for greater deductions in future tax years. For information on our strategic tax filing and planning services for your business or rental properties, please see our website or call us to schedule an appointment with one of our tax attorneys today.

Additional Resources:

  1. www.journalofaccountancy.com: Qualified Business Income Deduction Regs and Other Guidance Issued. https://www.journalofaccountancy.com/news/2019/jan/sec-199a-qbi-deduction-201920483.html
  2. www.irs.gov: Section 199A Trade or Business Safe Harbor: Rental Real Estate. https://www.irs.gov/pub/irs-drop/n-19-07.pdf

Rosenberg Martin Greenberg

25 South Charles Street, 21st Floor MD 21201
Phone: 410-727-6600
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Rosenberg Martin Greenberg

705 Melvin Avenue Annapolis, MD 21401
Phone: 410-727-6600
Map & Directions