Rp2019-38

HIGHLIGHTS
OF THIS ISSUE




Bulletin No. 2019–42
October 15, 2019

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

EMPLOYMENT PLANS

Rev. Proc. 2019- 38, page 942.

This revenue procedure provides for a safe harbor under
which a rental real estate enterprise will be treated as a trade
or business solely for purposes of section 199A of the Internal Revenue Code (Code). To qualify for treatment as a trade
or business under this safe harbor, the rental real estate enterprise must satisfy the requirements of the revenue procedure. If an enterprise fails to satisfy these requirements,
the rental real estate enterprise may still be treated as a
trade or business for purposes of section 199A if the enterprise otherwise meets the definition of trade or business in
§ 1.199A-1(b)(14).
Finding Lists begin on page ii.

26 CFR 1.199A-1: Trade or Business
(Also: § 199A)

Rev. Proc. 2019-38
SECTION 1. PURPOSE
This revenue procedure provides a
safe harbor under which a rental real estate enterprise will be treated as a trade or
business for purposes of section 199A of
the Internal Revenue Code (Code) and §§
1.199A-1 through 1.199A-6 of the Income
Tax Regulations (26 CFR Part I). The safe
harbor provided by this revenue procedure applies solely for purposes of section
199A. If an enterprise fails to satisfy the
requirements of this safe harbor, it may be
treated as a trade or business for purposes
of section 199A if the enterprise otherwise
meets the definition of trade or business in
§ 1.199A-1(b)(14).
SECTION 2. BACKGROUND
.01 In general. Section 199A was enacted on December 22, 2017, as part of
the Tax Cuts and Jobs Act, Pub. L. 115-97,
and was amended on March 23, 2018, retroactively to January 1, 2018, by the Consolidated Appropriations Act, 2018, Pub.
L. 115-141. Congress enacted section
199A to provide a deduction to non-corporate taxpayers of up to 20 percent of the
taxpayer’s qualified business income from
each of the taxpayer’s qualified trades
or businesses, including those operated
through a partnership, S corporation, or
sole proprietorship, as well as a deduction
of up to 20 percent of aggregate real estate
investment trust dividends and qualified
publicly traded partnership income.
.02 Trade or business. Section 199A(d)
defines a qualified trade or business as
any trade or business other than a specified service trade or business (SSTB) or
a trade or business of performing services
as an employee. Section 1.199A-1(b)(14)
defines trade or business for purposes of
section 199A as a trade or business under

October 15, 2019

section 162 other than the trade or business of performing services as an employee. In addition, § 1.199A-1(b)(14) provides that rental or licensing of tangible
or intangible property (rental activity) that
does not rise to the level of a section 162
trade or business is nevertheless treated as
a trade or business for purposes of section
199A, if the property is rented or licensed
to a trade or business conducted by the individual or a relevant passthrough entity
(RPE) which is commonly controlled under § 1.199A-4. Sections 1.199A-5(b) and
1.199A-5(d) define an SSTB and the trade
or business of performing services as an
employee, respectively.
.03 Notice 2019-07. The Treasury
Department and the IRS are aware that
whether an interest in rental real estate rises to the level of a trade or business for
purposes of section 199A is the subject of
uncertainty for some taxpayers. To help
mitigate this uncertainty, a proposed version of a revenue procedure containing a
safe harbor for treating a rental real estate
enterprise as a trade or business solely for
purposes of section 199A was released
for public comment in Notice 2019-07,
2019-09 IRB 740. This revenue procedure
is issued following consideration of all
public comments received by the IRS and
the Treasury Department and sets forth the
safe harbor and the procedural requirements for using it.
SECTION 3. RULES OF
APPLICATION
.01 In general. This safe harbor is
available to taxpayers who seek to claim
the deduction under section 199A with respect to a rental real estate enterprise as
defined in section 3.02. If the safe harbor
requirements are met, the rental real estate
enterprise will be treated as a single trade
or business as defined in section 199A(d)
for purposes of applying the regulations
under section 199A, including the application of the aggregation rules in § 1.199A4. RPEs, as defined in § 1.199A-1(b)(10),
may also use this safe harbor. In order to
rely upon the safe harbor, taxpayers and
RPEs must satisfy all of the requirements
of this revenue procedure. Failure to satisfy the requirements of this safe harbor
does not preclude a taxpayer or the Service from otherwise establishing that an

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interest in rental real estate is a trade or
business for purposes of section 199A.
.02 Rental real estate enterprise. Solely for purposes of this safe harbor, a rental
real estate enterprise is defined as an interest in real property held for the production
of rents and may consist of an interest in
a single property or interests in multiple
properties. The taxpayer or RPE relying
on this revenue procedure must hold each
interest directly or through an entity disregarded as an entity separate from its owner under any provision of the Code.
Except for those property interests described in paragraph .05 of this section,
taxpayers and RPEs may either treat each
interest in similar property held for the
production of rents as a separate rental
real estate enterprise or treat interests in
all similar properties held for the production of rents as a single rental real estate
enterprise. For purposes of applying this
revenue procedure, properties held for
the production of rents are similar if they
are part of the same rental real estate category. The two types of rental real estate
categories for the purpose of combining
properties into a single rental real estate
enterprise are residential and commercial.
Thus, commercial real estate held for the
production of rents may only be part of
the same enterprise with other commercial
real estate, and residential properties may
only be part of the same enterprise with
other residential properties.
Once a taxpayer or RPE treats interests
in similar commercial properties or similar residential properties as a single rental
real estate enterprise under the safe harbor, the taxpayer or RPE must continue
to treat interests in all similar properties,
including newly acquired properties, as a
single rental real estate enterprise when
the taxpayer or RPE continues to rely on
the safe harbor. However, a taxpayer or
RPE that chooses to treat its interest in
each residential or commercial property
as a separate rental real estate enterprise
may choose to treat its interests in all similar commercial or all similar residential
properties as a single rental real estate enterprise in a future year.
An interest in mixed-use property may
be treated as a single rental real estate enterprise or may be bifurcated into separate
residential and commercial interests. For
purposes of this revenue procedure, mixed-

Bulletin No. 2019–42

use property is defined as a single building
that combines residential and commercial
units. An interest in mixed-use property, if
treated as a single rental real estate enterprise, may not be treated as part of the same
enterprise as other residential, commercial,
or mixed-use property.
Each rental real estate enterprise that
satisfies the requirements of this safe
harbor is treated as a separate trade or
business for purposes of applying section
199A and the regulations thereunder.
.03 Safe harbor. The determination to
use this safe harbor must be made annually. Solely for the purposes of section
199A, each rental real estate enterprise
will be treated as a single trade or business
if the following requirements are satisfied
during the taxable year with respect to the
rental real estate enterprise:
(A) Separate books and records are maintained to reflect income and expenses
for each rental real estate enterprise.
If a rental real estate enterprise contains more than one property, this requirement may be satisfied if income
and expense information statements
for each property are maintained and
then consolidated;
(B) For rental real estate enterprises that
have been in existence less than four
years, 250 or more hours of rental
services are performed (as described
in this revenue procedure) per year
with respect to the rental real estate
enterprise. For rental real estate enterprises that have been in existence
for at least four years, in any three
of the five consecutive taxable years
that end with the taxable year, 250 or
more hours of rental services are performed (as described in this revenue
procedure) per year with respect to
the rental real estate enterprise;
(C) The taxpayer maintains contemporaneous records, including time reports,
logs, or similar documents, regarding
the following: (i) hours of all services performed; (ii) description of
all services performed; (iii) dates on
which such services were performed;
and (iv) who performed the services.
If services with respect to the rental
real estate enterprise are performed
by employees or independent contractors, the taxpayer may provide a
description of the rental services per-

Bulletin No. 2019–42

formed by such employee or independent contractor, the amount of time
such employee or independent contractor generally spends performing
such services for the enterprise, and
time, wage, or payment records for
such employee or independent contractor. Such records are to be made
available for inspection at the request
of the IRS; and
(D) The taxpayer or RPE attaches a statement to a timely filed original return
(or an amended return for the 2018
taxable year only) for each taxable
year in which the taxpayer or RPE
relies on the safe harbor. A tax­payer
or RPE with more than one rental real
estate enterprise relying on this safe
harbor may submit a single statement but the statement must list the
required information separately for
each rental real estate enterprise. The
statement must include the following
information:
(1) A description (including the address and rental category) of all
rental real estate properties that
are included in each rental real
estate enterprise;
(2) A description (including the address and rental category) of
rental real estate properties acquired and disposed of during the
taxable year; and
(3) A representation that the requirements of this revenue procedure
have been satisfied.
.04 Rental services. Rental services for
purpose of this revenue procedure include,
but are not limited to: (i) advertising to
rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant
applications; (iv) collection of rent; (v)
daily operation, maintenance, and repair
of the property, including the purchase of
materials and supplies; (vi) management
of the real estate; and (vii) supervision of
employees and independent contractors.
Rental services may be performed by
owners, including owners of an RPE, or
by employees, agents, and/or independent
contractors of the owners. The term rental
services does not include financial or investment management activities, such as
arranging financing; procuring property;
studying and reviewing financial state-

943

ments or reports on operations; improving
property under § 1.263(a)-3(d); or hours
spent traveling to and from the real estate.
.05 Certain rental real estate arrangements excluded. The following types of
property may not be included in a rental
real estate enterprise and are therefore not
eligible for the safe harbor:
(A) Real estate used by the taxpayer (including an owner or beneficiary of
an RPE) as a residence under section
280A(d).
(B) Real estate rented or leased under a
triple net lease. For purposes of this
revenue procedure, a triple net lease
includes a lease agreement 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.
(C) Real estate rented to a trade or business conducted by a taxpayer or an
RPE which is commonly controlled
under § 1.199A-4(b)(1)(i).
(D) The entire rental real estate interest if
any portion of the interest is treated
as an SSTB under § 1.199A-5(c)(2)
(which provides special rules where
property or services are provided to
an SSTB).
SECTION 4. EFFECTIVE DATE
This revenue procedure applies to
taxable years ending after December 31,
2017. Alternatively, taxpayers and RPEs
may rely on the safe harbor set forth in
Notice 2019-07, 2019-09 IRB 740, for
the 2018 taxable year. The contemporaneous records requirement will not apply to taxable years beginning prior to
January 1, 2020. However, taxpayers are
reminded that they bear the burden of
showing the right to any claimed deductions in all taxable years. INDOPCO, Inc.
v. Comm’r, 503 U.S. 79, 84; 112 S.Ct.
1039, 1043) (1992); Interstate Transit
Lines v. Comm’r, 319 U.S. 590, 593, 63
S.Ct. 1279, 1281 (1943). See also I.R.C.
§ 6001; Treas. Reg. § 1.6001-1(a) and (e).
SECTION 5. PAPERWORK
REDUCTION ACT
.01 Collections of Information – Forms
1040, 1040-NR, 1040-SR, 1041, 1065,
and 1120S.

October 15, 2019

The collections of information in this
revenue procedure are in sections 3.03(C)
and 3.03(D). The information collection
requirement pursuant to section 3.03(C) is
discussed further below. The IRS intends
that the collections of information pursuant to section 3.03(D) will be conducted
by way of attachment to the following:
• Form 1040, U.S. Individual Income
Tax Return;
• Form 1040-NR, U.S. Nonresident
Alien Income Tax Return;
• Form 1040-SR, U.S. Tax Return for
Seniors;
• Form 1041, U.S. Income Tax Return
for Trusts and Estates;
• Form 1065, U.S. Return of Partnership Income; or
• Form 1120S, U.S. Income Tax Return
for an S Corporation
For purposes of the Paperwork Reduction Act, the reporting burden associated
with the collections of information with
respect to section 3.03(D) will be reflected in the IRS Forms 14029 Paperwork
Reduction Act Submission, associated
with the Forms 1040 and 1040-NR (OMB
control number 1545-0074), Form 1041
(OMB control number 1545-0092), and
Forms 1065 and 1120S (OMB control
numbers 1545-0123).
.02 Collection of Information – Section
3.03(C)
In contrast to the collections of information pursuant to the provisions of
section 3.03(D) (as discussed above),
the IRS intends that the information collection requirements pursuant to section
3.03(C) will be satisfied by the taxpayer
maintaining contemporaneous records
that are adequate to verify the number of
service hours performed with respect to
a rental real estate enterprise, including
(i) hours of all services performed; (ii)
description of all services performed;
(iii) dates on which such services were
performed; and (iv) who performed the
services.

October 15, 2019

The collection of information contained
in section 3.03(C) will be submitted to the
Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1994 (44 U.S.C. 3507(d)).
Comments on the collection of information
should be sent to the Office of Management and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the
collection of information should be received by December 16, 2019.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the duties of the IRS, including whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (including underlying assumptions and methodology);
How the quality, utility, and clarity of
the information to be collected may be enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through the
application of automated collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and purchases of services to provide information.
The collection of information in section 3.03(C) is mandatory for respondents
that choose to rely on the safe harbor. The
likely respondents are individuals, partnerships, S corporations, trusts, and estates that own rental real estate.
The estimated total annual reporting
and/or recordkeeping burden is 5.5 million hours.

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The estimated annual burden per respondent/recordkeeper varies from 3 to 10
hours, depending on individual circumstances, with an estimated average of 5
hours. The estimated number of respondents and/or recordkeepers is 1.1 million.
This estimate is based on an assumption
that only a portion of taxpayers and RPEs
with interests in rental real estate (based
on numbers of Schedule E and Forms
8825 filed) will choose to rely on the safe
harbor.
The estimated annual frequency of responses (used for reporting requirements
only) is annual.
Using the IRS’s taxpayer compliance
cost estimates, individuals filing Form
1040 Schedule E are estimated to have
a monetization rate of $25.63 per hour.
Passthrough entities filing Form 8825 are
estimated to have a monetization rate of
$40.16 per hour.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.
SECTION 6. DRAFTING
INFORMATION
The principal authors of this revenue
procedure are Robert D. Alinsky, Vishal
R. Amin, Margaret Burow, and Sonia K.
Kothari of the Office of the Associate
Chief Counsel (Passthroughs & Special
Industries). However, other personnel
from the Treasury Department and the
IRS participated in its development. For
further information regarding this revenue procedure contact Robert D. Alinsky
or Margaret Burow at (202) 317-5279 or
Vishal R. Amin or Sonia K. Kothari at
(202) 317-6850 (not a toll-free number).

Bulletin No. 2019–42