On January 18, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury issued final regulations (the “Final Regulations”) on the “pass through” deduction under section 199A[1] of the Internal Revenue Code (the “Code”). Very generally, section 199A provides individuals with a deduction of up to 20% of income from a domestic “trade or business” operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The Final Regulations define trade or business as “a trade or business under section 162, other than the trade or business of performing services as an employee.”[2]

Prior to the issuance of the Final Regulations, taxpayer commenters expressed uncertainty as to whether a rental business qualified as a trade or business under section 199A—based on a long-standing uncertainty as to whether, and to what extent, a rental real estate business was a trade or business for purposes of section 162.

To provide some certainty for taxpayers potentially entitled to the pass-through deduction, the IRS released Notice 2019-07 (the “Notice”) in conjunction with the Final Regulations. The Notice proposes a safe harbor under which taxpayers (including partnerships and S corporations owned by at least one individual, estate, or trust) may treat a “rental real estate enterprise” as a trade or business solely for the purposes of the section 199A deduction. Because the Notice would provide a safe harbor—and not a substantive rule—failure to meet the tests set forth in the Notice does not necessarily mean a rental real estate business is ineligible for the section 199A deduction. If the Notice standards are not met, then the general test under section 162 would need to be met for such a business.[3] However, in certain other contexts, tax professionals and the IRS have viewed safe harbors as establishing the bounds of the substantive law; it remains to be seen whether taxpayers will claim the pass-through deduction for real estate leasing activities that fail to satisfy the safe harbor.

Although any clarity provided by the IRS regarding section 199A and rental real estate businesses is helpful, the safe harbor itself is vague on multiple key points, and the safe harbor expressly does not apply to triple net leases. The utility of the safe harbor may, therefore, be exceedingly limited. Moreover, due to the uncertainty surrounding the definition of a “triple net lease” and the express exclusion of triple net leases from the scope of the safe harbor, as discussed below, the Notice may cause greater confusion in the section 199A context than it seeks to alleviate.

Basically, a rental real estate business can meet the safe harbor as long as “as least 250 hours of rental services” are performed with respect to the rental real estate enterprise either (i) each year (for tax years beginning on or before December 31, 2022), or (ii) in three of the prior five years (for later tax years) and certain recordkeeping requirements and other procedural requirements are met. The key term “rental services” is only defined by a list of services—a list introduced by the word “include,” which lacks clarity as to whether the list is inclusive or exclusive. The particular specified services on the list are:

  • Advertising to rent or lease the real estate;
  • Negotiating and executing leases;
  • Verifying information contained in prospective tenant applications;
  • Collection of rent;
  • Daily operation, maintenance, and repair of the rental property;
  • Management of the real estate;
  • Purchase of materials; and
  • Supervision of employees and independent contractors.

However, the following financial or investment management activities are specifically excluded from classification as rental services: arranging financing; procuring property; studying financial statements or operations reports; planning, managing, or constructing long-term capital improvements; and traveling to and from the rental property.

The Notice makes it clear that rental services can be performed on behalf of the rental real estate business by any of a broad range of persons, including any property owner directly, or by employees, agents, or independent contractors of the owner. Thus, a property owner that hires a management company to perform rental services for the property should be able to include the time spent by the management company (and its employees) in determining whether the 250 hour requirement is met.

In addition, for the purposes of meeting the 250 hour requirement, taxpayers may group similar properties as one enterprise. However, commercial and residential rental properties may not be part of the same rental real estate enterprise, and taxpayers may not modify treatment year by year “unless there has been a significant change in facts and circumstances.”

Additionally, there are two arrangements that are specifically excluded from the safe harbor. First, as mentioned above, any property rented under a “triple net lease” is excluded from being considered under the safe harbor. For purposes of the Notice, a triple net lease “includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities.” The word “include” suggests that other leases may be treated as triple net leases; however, the Notice may simply contemplate that a lease arrangement under which the lessor pays some expenses may still qualify as a triple net lease. Second, any property used by the taxpayer as a residence for part of the year under section 280A is also excluded.[4]

The Notice also contains consistency rules and tax return reporting rules.


[1] All references to “section” are to the Internal Revenue Code of 1986, as amended.

[2] Treas. Reg. § 1.199A-1(b)(14).

[3] While the Notice’s safe harbor applies solely in the context of section 199A, the definition of trade or business under section 199A is coextensive with the definition under section 162.

[4] Under section 280A(d), a taxpayer uses a “dwelling unit” as a “residence” if the taxpayer “uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.” For the purposes of section 280A(d), a “dwelling unit” includes “a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit.” I.R.C. § 280A(f)(1)(A).

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Photo of Richard M. Corn Richard M. Corn

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions, including:

  • mergers and acquisitions
  • cross-border transactions
  • joint ventures
  • structured financings
  • debt and equity issuances
  • restructurings
  • bankruptcy-related transactions

Richard M. Corn is a partner in the Tax Department. He focuses his practice on corporate tax structuring and planning for a wide variety of transactions, including:

  • mergers and acquisitions
  • cross-border transactions
  • joint ventures
  • structured financings
  • debt and equity issuances
  • restructurings
  • bankruptcy-related transactions

Richard advises both U.S. and international clients, including multinational financial institutions, private equity funds, hedge funds, asset managers and joint ventures. He has particular experience in the financial services and sports sectors. He also works with individuals and tax-exempt and not-for-profit organizations on their tax matters.

Richard began his career as a clerk for the U.S. Court of Appeals for the Fourth Circuit Judge J. Michael Luttig and then went on to clerk at the U.S. Supreme Court for Associate Justice Clarence Thomas. Prior to joining Proskauer, he most recently practiced at Sullivan & Cromwell as well as Wachtell, Lipton, Rosen and Katz.

Photo of Amanda H. Nussbaum Amanda H. Nussbaum

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate…

Amanda H. Nussbaum is the chair of the Firm’s Tax Department as well as a member of the Private Funds Group. Her practice concentrates on planning for and the structuring of domestic and international private investment funds, including venture capital, buyout, real estate and hedge funds, as well as advising those funds on investment activities and operational issues. She also represents many types of investors, including tax-exempt and non-U.S. investors, with their investments in private investment funds. Business partners through our clients’ biggest challenges, Amanda is a part of the Firm’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team helping to shape the guidance and next steps for clients impacted by the pandemic.

Amanda has significant experience structuring taxable and tax-free mergers and acquisitions, real estate transactions and stock and debt offerings. She also counsels both sports teams and sports leagues with a broad range of tax issues.

In addition, Amanda advises not-for-profit clients on matters such as applying for and maintaining exemption from federal income tax, minimizing unrelated business taxable income, structuring joint ventures and partnerships with taxable entities and using exempt and for-profit subsidiaries.

Amanda has co-authored with Howard Lefkowitz and Steven Devaney the New York Limited Liability Company Forms and Practice Manual, which is published by Data Trace Publishing Co.

Photo of David S. Miller David S. Miller

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers…

David Miller is a partner in the Tax Department. David advises clients on a broad range of domestic and international corporate tax issues. His practice covers the taxation of financial instruments and derivatives, cross-border lending transactions and other financings, international and domestic mergers and acquisitions, multinational corporate groups and partnerships, private equity and hedge funds, bankruptcy and workouts, high-net-worth individuals and families, and public charities and private foundations. He advises companies in virtually all major industries, including banking, finance, private equity, health care, life sciences, real estate, technology, consumer products, entertainment and energy.

David is strongly committed to pro bono service, and has represented more than 200 charities. In 2011, he was named as one of eight “Lawyers Who Lead by Example” by the New York Law Journal for his pro bono service. David has also been recognized for his pro bono work by The Legal Aid Society, Legal Services for New York City and New York Lawyers For The Public Interest.

Photo of Stuart Rosow Stuart Rosow

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international…

Stuart Rosow is a partner in the Tax Department and a leader of the transactional tax team. He concentrates on the taxation of complex business and investment transactions. His practice includes representation of publicly traded and privately held corporations, financial institutions, operating international and domestic joint ventures, and investment partnerships, health care providers, charities and other tax-exempt entities and individuals.

For corporations, Stuart has been involved in both taxable and tax-free mergers and acquisitions. His contributions to the projects include not only structuring the overall transaction to ensure the parties’ desired tax results, but also planning for the operation of the business before and after the transaction to maximize the tax savings available. For financial institutions, Stuart has participated in structuring and negotiating loans and equity investments in a wide variety of domestic and international businesses. Often organized as joint ventures, these transactions offer tax opportunities and present pitfalls involving issues related to the nature of the financing, the use of derivations and cross-border complications. In addition, he has advised clients on real estate financing vehicles, including REITs and REMICs, and other structured finance products, including conduits and securitizations.

Stuart’s work on joint ventures and partnerships has involved the structuring and negotiating of a wide range of transactions, including deals in the health care field involving both taxable and tax-exempt entities and business combinations between U.S. and foreign companies. He has also advised financial institutions and buyout funds on a variety of investments in partnerships, including operating businesses, as well as office buildings and other real estate. In addition, Stuart has represented large partnerships, including publicly traded entities, on a variety of income tax matters, including insuring retention of tax status as a partnership; structuring public offerings; and the tax aspects of mergers and acquisitions among partnership entities.

Also actively involved in the health care field, Stuart has structured mergers, acquisitions and joint ventures for business corporations, including publicly traded hospital corporations, as well as tax-exempt entities. This work has led to further involvement with tax-exempt entities, both publicly supported entities and private foundations. A significant portion of the representation of these entities has involved representation before the Internal Revenue Service on tax audits and requests for private letter rulings and technical advice.

Stuart also provides regular advice to corporations, a number of families and individuals. This advice consists of helping to structure private tax-advantaged investments; tax planning; and representation before the Internal Revenue Service and local tax authorities on tax examinations.

A frequent lecturer at CLE programs, Stuart is also an adjunct faculty member of the Columbia Law School where he currently teaches Partnership Taxation.