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2018-23: IRC §199A information released in draft publication


The IRS recently released a draft of Publication 535 for 2018. The publication, which was previously titled "Business Expenses," is currently untitled and now provides 10 pages of new IRS information on the IRC §199A deduction.

Two items in the draft publication are noteworthy:

  1. It states that that "the ownership and rental of real property doesn’t, as a matter of law, constitute a trade or business, and the issue is ultimately one of fact in which the scope of the taxpayer’s activities in connection with the property must be so extensive as to give rise to the stature of a trade or business" (emphasis added).
    This language quashes the idea that all rental real estate will qualify for the IRC §199A deduction, but it is not clear what "so extensive" means. In other words, it appears that something more than mere ownership of rental real estate is required.
  2. The publication contradicts Treas. Regs. §1.199A-5 regarding real estate and insurance agents and brokers by stating that a specified service trade or business is any trade or business providing services in the fields of brokerage services including arranging transactions between a buyer and a seller for a commission or fee "such as stock brokers, real estate agents and brokers, insurance agents and brokers, and intellectual property brokers."
    While the current language in Draft Publication 535 directly contradicts the regulations regarding real estate and insurance agents and brokers, practitioners must remember that the regulations are authoritative and carry the full force and effect of law while IRS publications are merely informative. Also keep in mind that this is a draft version of the publication, and this language is not yet final.

UPDATE: On December 27, 2018, we issued the above flash e-mail stating that the IRS’s most recently released draft of Publication 535 stated that real estate and insurance agents and brokers are specified service trades or businesses (SSTBs) in direct contradiction to the IRC §199A regulations. On January 7, 2019, the IRS released an updated draft of Publication 535 correcting their error.