Tax Carve-Out for U.S. Real Estate Agents, Brokers, and Managers

The Tax Cuts and Jobs Act created a new Section 199A of the Internal Revenue Code (IRC) that provides for a potential tax break on qualified business income of non-corporate taxpayers, beginning in 2018.

Section 199A requires that the qualified business be effectively connected with the conduct of a trade or business within the United States.  Many have wondered if an investment in U.S. real estate is eligible for the new deduction.  Unfortunately, simply owning rental real estate does not give rise to the level of a trade or business and is generally not enough to qualify.  The taxpayer should be engaged in a U.S. real estate business with some level of continuity and regularity.  Guidance from IRC Section 469 in qualifying as a real estate professional is helpful in this regard.

Surprisingly, however, the Proposed Treasury Regulations under IRC Section 199A have also excluded real estate agents, brokers, and managers from the definition of a specified service trade or business. The result of the so-called specified service business classification has the effect of limiting most high-income professionals who generate income from their own labor and personal efforts from benefiting under the new law.  But with respect to the real estate industry, a special exception exists not only for non-passive real estate investors, but also for real estate agents, brokers, and managers.  This carve-out allows such professionals to be eligible for the IRC Section 199A deduction despite higher levels of income and provides for a new planning opportunity. These taxpayers should consult with their advisors to evaluate whether a 2018 year-end tax planning strategy is necessary to take full advantage of the new Section 199A deduction.