Qualified Business Income (QBI) and The Rental Real Estate Safe Harbor (Rev. Proc. 2019-38)

October 19, 2019

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By Ron Roberson 

In my last article we discussed the ambiguity that surrounds whether rental real estate qualifies as a trade or business activity for purposes of Internal Revenue Code §199A, the qualified business income (QBI) deduction. To provide at least some clarity, the IRS recently finalized a rental real estate safe harbor where, if all requirements are met, the underlying rental activity will be deemed to be a trade or business for QBI purposes regardless if the taxpayer is an individual or a pass-through entity. This article takes a closer look at the safe harbor provisions detailed in Revenue Procedure 2019-38.  

Rental real estate activity. Rev. Proc. 2019-38 defines a rental real estate activity as an interest in real property held for the production of rents which may consist of an interest in a single or multiple properties. Any individual or relevant pass-through entity (RPE) relying on the safe harbor must hold its interest directly or through a disregarded entity. Taxpayers must treat each rental activity as a separate enterprise or treat all similar rental activities as one single activity. Commercial and residential real estate may not be combined as one activity. Mixed use property (one property with both residential and commercial use) may be treated as a single, separate enterprise or may be bifurcated into two separate activities. Taxpayers may not vary treatment from year-to-year unless there has been a significant change in the underlying facts and circumstances.

Specific real estate activities are excluded. Certain rental real estate activities are specifically excluded from this safe harbor, including:

  • Real estate used by the taxpayer (including an owner or beneficiary of an RPE) as a residence for any part of the year under 280A;
  • Real estate rented or leased under a triple net lease4;
  • Real estate rented to a trade or business conducted or controlled by the landlord; or
  • The entire real estate interest if any portion or the interest is treated as a specified service trade or business (SSTB).

Safe Harbor requirements. Use of the safe harbor is determined on annual basis and the following requirements must be met:

1. Separate books and records must be maintained to reflect income and expenses for each rental real estate activity;

2. 250 or more hours of “rental services” (as defined in Notice 2019-7) are performed each year with respect to that specific rental activity. For years beginning after December 31, 2022, the 250-hour test must be met in three of the five consecutive years ending with the year being tested. If an activity has been held less than five years, the 250-hour test must be met each year the activity is owned.

Example. Barry bought an eight-unit apartment complex in 2016 that he manages himself. Barry is able to show that more than 250 hours of rental services were provided to the apartment complex in 2018. Assuming all other requirements are met, Barry may treat the apartments as a QBI activity for the 2018 tax year.

Example variation. During 2019, 2020 and 2021, Barry is unable to prove the required 250 hours of rental services were completed for his apartment complex. But, in 2022 Barry meets the 250-hour requirement and is therefore allowed to use the safe harbor. Barry also meets the 250-hour requirement in 2023 and then finds out the bad news. Because he doesn’t meet the 250-hour test in three of five years, Barry may not use the safe harbor in 2023.                

3. The taxpayer maintains contemporaneous records (e.g. time reports, logs, etc.) that contain all of the following:
  • Hours of all services performed;
  • Description of all services performed;
  • Dates on which such services were performed; and
  • Who performed the services.

Preparer note. The contemporaneous records requirement does not apply to 2018. It is effective for years beginning on or after January 1, 2019.

4. Taxpayer must attach a statement to the return in any year the safe harbor is claimed that includes a description of the rental activity, a description of any real estate activities acquired or disposed of during the year, and a taxpayer representation that all requirements of the safe harbor have been met.

“Rental Services” defined. Notice 2019-07 notes that “rental services” may be performed by owners, employees, agents, and/or independent contractors and include:

  • Advertising to rent or lease the real estate;
  • Negotiating and executing leases;
  • Verifying information contained in tenant applications;
  • Rent collection;
  • Daily operation, maintenance, and repair of the rental property;
  • Management of the real estate;
  • Purchase of materials; and
  • Supervision of employees and independent contractors.

“Rental services” do NOT include:

  • Financial or investment management activities (e.g. arranging financing, procuring properties, studying and reviewing financial statements);
  • Planning, managing, or constructing long-term capital improvements; or
  • Time spent traveling to and from the real estate.

Example. Will owns a commercial rental property for which he maintains separate books and records. Based on contemporaneous time logs, Will has determined the hours were spent on his rental property in 2019 were:






Done By


Total Hours


Qualifying Hours

Non-Qualifying Hours

Collecting and depositing rents





Tenant in/out moves





Maintenance and repairs





Supervise manager and agents





Refinance mortgage





Analyze sale of property










Will meets the hours requirement of the rental real estate safe harbor regardless of the fact that Will only spent 15 hours working in the activity in 2019. The time spent by the property manager and subcontractors counts in the hour total as long as Will can document it.


Making the rental real estate safe harbor election.
Those using the rental real estate safe harbor to claim the QBI deduction are required to attach a statement to their return stating that the safe harbor requirements are met. The statement must also include the signature of the taxpayer or the representative of an RPE and state “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.” The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the statement.


Sample Statement

Taxpayer: Michelle Williams ID#: 555-55-5555

Tax Year: 2019

I have personal knowledge of the facts and circumstances related to rental real estate reported in this return. I attest that the Section 199A deduction requirements detailed in IRS Notice 2019-07 have been satisfied.

Under penalties of perjury, I declare that I have examined the statement, and, to the best of my  knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.

Michelle Williams  


4For this purpose, a triple net lease is defined as a lease arrangement that requires the tenant to pay taxes, fees, and insurance, and to be responsible for maintenance activities for the property, even if the tenant only pays a portion of these items allocable to the portion of the property the tenant rents.

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