The Tax Cuts and Jobs Act of 2017 (TCJA) was a major overhaul of the tax law.
Real estate businesses were significantly impacted as a result of the changes. For the most part, the new rules mean a positive outcome for REITs.
Section 199A – QBI deduction
Section 199A entitles eligible taxpayers to deduct 20% of qualified REIT dividends and qualified publicly traded partnership (PTP) income. The term “qualified REIT dividends” does not include capital gain dividends.
In addition, Section 199A allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from a domestic business, such as a partnership, sole proprietorship, S Corporation, trust, or estate. In order to take the 20% QBI deduction, income must be from a qualified trade or business under Section 162, which does not provide an explicit definition of what it means to be a trade or business. Furthermore, under the final Section 199A regulations, the Treasury declined to provide a bright line test for whether a rental real estate activity is considered a trade or business. The Treasury did, however, provide a safe harbor for qualifying rental real estate activities as a trade or business.