Take Advantage of IRS Section 199A Safe Harbor for NNN Lease Investments

A NNN net lease property is one in which the tenant/s is required to pay all, of the taxes, insurance, and maintenance costs for an investment property.

For most owners of NNN triple net leased investment properties, the safe harbor under Section 199A does not necessarily apply to NNN property leases. But there are provisions that could be an advantage for net lease investors. 

Section 199A, also referred to as the 20% Pass Through Deduction, allows taxpayers to take a deduction for up to 20% of their qualified income from certain rental businesses, business income from partnerships, S Corps, schedule C operations, etc.  In the initial phases of the deduction being implemented, taxpayers did not know whether a rental business qualified as a trade or business.  To clarify matters, Notice 2019-38 was released which identified a safe harbor method under which taxpayers may treat a rental real estate enterprise as a trade or business solely for purposes of Section 199A.

The section 199A safe harbor does not specifically apply to real estate investor/tax payers that own triple net lease properties. In addition, triple NNN net lease ownership does not automatically preclude a 199A deduction. Actually, a rental real estate business can still be treated as a trade or business for the purpose of section 199A if the enterprise otherwise meets the definition of trade or business under IRS Section 162.

If a NNN net lease triple net real estate business, its agents and subcontractors are regularly and continuously involved in the activity of the property, NNN net lease investors may be able to establish that it is a trade or business and is not being operated under a pure NNN lease term. Here is a good example: A NNN Landlord owns and operates commercial rental property in Falls Church, Virginia which is leased by 10 tenants. The Landlord maintains and repairs as needed keep all portions of common areas in good appearance and condition as well as structural upkeep. The Landlord also contracts vendors for the repair and maintenance of property equipment such as the HVAC, boiler, electrical circuits, etc., which serves building and common areas. The Landlord diligently issues Forms 1099 to the contractors for all contracted services.”

Thus, a NNN rental real estate operation may meet the Section 199A safe harbor as long as it meets the following guidelines:

• The taxpayer investor keeps records, including:  1) description of all services performed 2) hours of services performed, 3) who performed the services and 4) dates on which services are performed, plus
• Separate books and records are maintained for each rental operation (and/or the combined business),
• Minimum 250 hours of rental services are performed in the rental real estate business operation claiming such 199A deduction

Your expert advisors at the Triple Net Investment Group have consistently, thoroughly and successfully advised on complicated NNN net lease transactions with tax advantages. Call today, if you are unsure about your current NNN lease property or portfolio’s bedrock value strategies during this pandemic.