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by Jeffrey Taylor via 

Here's a "hint" as to just ONE of the requirements to receive the new deduction that drops your taxable business income by up to 20%: When is a landlord in a "trade or business"?  When is a landlord merely "investing for the production of income"?  When are they running a "trade or business" and when are they "mere investors"?  I have researched some obscure case law on these issues because it is now very, very relevant. And I want to share a few key points: 
1) The new tax reform law did not define a Trade or Business (T/B). This is common, which is why there's a bunch of case laws that define T/B in the context of rentals for various different parts of the Internal Revenue Code. I have listed a fair number of them below. Can Courts decide to start fresh on Section 199A and invent a brand new definition of T/B for rentals? Sure. Given the ease and past patterns with similar issues, that is also very unlikely.
Note: The definition of "Trade or Business" does vary for different portions of the Code. It also varies for different types of businesses, say rentals vs. loans vs. stock trading. The courts can make up a brand new definition for Code Section 199A. It's possible, not probable, and not what they normally do. They normally borrow from the more widely litigated areas of the law, such as "is a rental a T/B for purposes of Section 162 or 280A?"

2) There's a good bit of case law on this in different contexts
 and it all points in the same direction: It takes very little activity to have a T/B where rentals are concerned. See: 
Anderson, T. C. Memo. 1982-576
Curphey, 73 T.C. 766
Gilford, 201 F.2d 735
GRIER et al. v. UNITED STATES (1954), didn't have the full citation handy
Murtaugh, T.C. Memo. 1997-319 (1997)
ALVARY, 302 F.2d 790
IRS Letter Ruling 9840026
Revenue Ruling 73-522 (but there's different wording for that statute, which is why I think xxx lease issue is still grey, add that RR's are not "law"). I'll bet there are another 4 or 5 out there, all in the same vein.
Bottom line: We go with what we've got. And what we've got is actually quite a lot. The odds are very, very high that existing T/B for rental real estate rules will apply. And that is good, since the existing rules make it easy for rentals to be a T/B. And in any event, they are all we've got to go on. Unless the courts break with their normal approach and make up a brand new definition for what is a T/B in a rental context, the odds are very high that the existing and generous definition will be used.

John Hyre is a tax attorney with 22 years of experience.  His virtual practice caters to real estate investors, small businesses, and self-directed IRA/401k investors all over the US. John provides extensive planning, structuring, tax-reduction, and asset protection services. He also represents taxpayers in audits and Tax Court, and assists taxpayers who owe the IRS money. He's been invited to speak at our Landlord Convention

John recently conducted a full two hour informative webinar, plus a two hour Q&A follow-up. Both sessions were recorded on "How the New Tax Law Works for Landlords". In the webinar he explains how landlords  and real estate investors can structure their activity so that it rises to the level of a "trade or business and thereby maximize their tax savings". Click now if you missed that webinar.
Agree or Disagree? Share your thoughts. We welcome your feedback or any landlording tip you would like to share. Email

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