Section 199A Qualified Business Income Deduction for Real Estate Owners and Investors

January 24, 2018

The newly enacted Section 199A Qualified Business Income (QBI) deduction allows certain pass through businesses, including real estate investors, a deduction up to 20% of qualified business income. 

A limitation applies if you are married with more than $315,000 of taxable income or single with more than $157,500 of taxable income and is phased in for individuals exceeding the threshold amounts over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals). 

For those subject to the limitation, the deduction cannot exceed the greater of: 

  1. 50% of the W-2 wages paid with respect to the qualified trade or business (W-2 wage limit) or
  2. The sum of 25% of wages paid plus 2.5% of the unadjusted basis of all depreciable assets. 

In general, the deduction cannot exceed 20% of the excess of the taxpayer's taxable income over net capital gain. 

While the law is not clear, many professionals believe that the Section 199A deduction will not apply to real estate triple-net lease properties.  A triple-net lease (triple-net or NNN) is a lease agreement where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three "nets") on the property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.).  For purposes of Section 199A, triple net lease properties may not be considered a trade or business. 

Until further guidance is received, you may want to consider transitioning any triple net lease agreements into other lease structures to take advantage of the QBI deduction under Section 199A.   We will continue to keep you updated on any new developments in this area.

Mueller Prost is here to help. Please contact Douglas M. Mueller, CPA or Teri Samples, CPA with any questions. 

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