March 29, 2019
Internal Revenue Service
1111 Constitution Avenue NW
Washington, DC 20224
Re: Public Comment Regarding Notice 2019-07, Section 199A Rental Real Estate, Proposed Revenue Procedure for Safe Harbor
Internal Revenue Service:
A significant number of taxpayer have requested that we submit these questions requesting clarification of IRS Notice 2019-07, Section 6, Form of Proposed Revenue Procedure (hereinafter “Proposed Safe Harbor”).
First, Proposed Safe Harbor, Section 3.02, Clause 4, states “Commercial and residential real estate may not be a part of the same enterprise.” Congress enacted Section 469(c)(7)(A) to specifically permit taxpayers to “elect to treat all interests in rental real estate as one activity.” There is concern that taxpayers that made statutory elections under Section 469(c)(7)(A) will be precluded from bifurcating those activities for purposes of qualifying under Proposed Safe Harbor given the language in Section 3.02, Clause 4.
Therefore, Castro & Co. requests the Internal Revenue Service to clarify that a valid statutory election under Section 469(c)(7)(A) will not preclude the bifurcation of commercial and residential real estate to claim the benefits of Proposed Safe Harbor.
Second, Proposed Safe Harbor, Section 3.03(B), requires only 250 hours of “rental services” to qualify, which averages to 43 minutes per day. Taxpayers would like to know whether a similar threshold will be established for other passive activities.
Therefore, Castro & Co. requests the Internal Revenue Service to clarify the extent to which this Proposed Safe Harbor will apply to other passive activities.
Third, Proposed Safe Harbor, Section 3.03(C) requires taxpayers to maintain “records, including time reports, logs… regarding… hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.” However, Proposed Safe Harbor, Section 3.04, Clause 2, states “Rental services may be performed by… independent contractors of the owners.” While taxpayers are certainly grateful for such a generous look-through rule, there is serious concern among taxpayers how they could meet the documentation and activity log standards established in Section 3.03(C) if they are utilizing independent contractors.
Therefore, Castro & Co. requests the Internal Revenue Service to either clarify that independent contractors may certify satisfaction of the Proposed Safe Harbor in the statement attached to taxpayer returns or add an exemption to Section 3.03(C) for taxpayers that utilize independent contractors to manage their rental real estate activities.
Fourth, Proposed Safe Harbor, Section 3.04, Clause 3, refers to “long-term” capital improvements. Historically, there has been dispute between what constitutes a short-term repair that may be deducted and what constitutes a long-term capital improvement that must be depreciated over time. There is concern that taxpayers may have to now have to distinguish between “long-term” capital improvements and “short-term” capital improvements.
Therefore, Castro & Co. requests the Internal Revenue Service to remove the phrase “long-term” or make a reference to an existing statutory provision or Treasury regulation for the definition of a capital improvement to remove uncertainty.
If you have any questions, please feel free to contact me at our Washington DC office at (202) 792-6600. We are always happy to assist in the evolution of our ever-changing federal tax system.
John Anthony Castro
International Tax Attorney
Managing Partner, Castro & Co.
cc: Robert D. Alinsky, Vishal R. Amin, Margaret Burow, and Frank J. Fisher
Office of the Associate Chief Counsel, Passthrough & Special Industries