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Real Estate Agents Win with the Treasury Department’s Final Rules on the 20% Deduction for Businesses

A move by the Treasury Department and the Internal Revenue Service will help small businesses including real estate agents with their bottom line as they prepare for tax filing season. Last week, the Treasury Department and the Internal Revenue Service issued final regulations regarding the new 20% deduction on qualified business income.

The ruling is a substantial provision of the Tax Cuts and Jobs Act, which allows owners of sole proprietorships, partnerships, trusts, and S corporations to deduct up to 20 percent of their qualified business income. The final regulations ensure that this historic tax cut will be available to the broadest spectrum of American businesses, consistent with the law, while minimizing compliance costs and streamlining the process for claiming the deduction.

According to the National Association of Realtors (NAR), a main component of the new tax law is a reduction of the corporate tax rate from 35 to 21 percent. However, since nine out of ten American businesses are structured as pass-through entities rather than corporations, the Section 199A provision provides critical tax deductions for small businesses and self-employed independent contractors, which is how many real estate professionals are classified.

Other key finding highlighted by NAR include:

  • The regulation clarifies that all real estate agents and brokers who are not employees but operate as sole proprietors or owners of partnerships, S corporations or limited liability companies are eligible for the new deduction, which can be as high as 20 percent.
  • The rule simplifies the process that owners of rental real estate property must follow to claim the new deduction. NAR strongly urged Treasury and the IRS to simplify the rules in order to give millions of rental real estate owners certainty surrounding their ability to qualify for this new deduction. Friday’s final regulations included a bright-line safe harbor test requiring at least 250 hours per year spent on maintaining and repairing property, collecting rent, paying expenses and conducting other typical landlord activities.
  • Within the proposed regulation released last August, those who had exchanged one parcel of real estate under Section 1031 for another parcel were unfairly denied deduction eligibility. However, NAR and multiple additional trade groups concerned with commercial real estate were vocal in highlighting this shortcoming. In a positive resolution to the situation, Treasury and the IRS recognized the initial ruling was misguided and corrected the policy.

Click here to read the full 247-page rules issued by the U.S. Treasury and IRS on January 18, 2019.

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