Taxes and Triple Net Leases: Knowing What’s Deductible in Section 199A

October 17, 2019

By: Jason Schneider, CPA/Partner, Osborne Rincon CPAs

Ranking high on the hottest tax topics of the 2018 filing season was in regards to Section 199A, which allows for a 20% tax deduction on qualified business income (QBI).

One limitation revolves around how this Internal Revenue Code section applies to rental real estate. The Internal Revenue Service (IRS) agreed to extend the 199A deduction to rental activities under certain circumstances – one of which was that the lease could NOT be a triple net lease.

Triple net leases have become an extremely popular investment vehicle. The tenant is responsible for paying property taxes, insurance and maintenance on the building in addition to rent and utilities.

By disallowing the application of the 199A deduction to these leases, the IRS is saying that because the burden of risk is being shifted to the tenant and not the landlord, then the tax benefit from this new provision will not apply either.

Under the right circumstance for owner-occupied property, it might be worth renewing or rewriting the lease to take advantage of this deduction. By converting to a traditional lease and charging an additional 1%-2% rent, the landlord would open the possibility of taking the deduction in this case.

Because there is no predicting what may happen with tax laws, consulting with your business and/or tax advisor prior to signing or renewing a lease would be a prudent business decision.

Jason A. Schneider, CPA, joined Osborne Rincon CPAs in August 2008, and has been in public and private accounting for over 17 years. He is a partner with Osborne Rincon, which is one of the oldest and most respected full-service accounting firms in the Coachella Valley. To learn more, call (760) 777-7805 or go to www.OsborneRincon.com.

Last modified: October 17, 2019

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