In 2017, the US Congress passed a bill known as the Tax Cuts and Jobs Act, which was signed by the President and has since become law. The Act modifies the tax code in various ways, generally reducing the amount of taxes that American business owners are required to pay annually. Part of the Act includes a 20% pass-through tax deduction on rental property business income. This deduction could make a significant difference in the tax burden for landlords who operate their rental properties as a business.
According to an article recently published by a financial advising trade publication, taking advantage of the deduction may not be simple for all Colorado landlords. The deduction requires landlords to own the property personally or through a business entity such as an LLC. Additionally, the properties must be managed as a “business” and not as an investment. Although the exact requirements for a property to be managed as a business are not clearly laid out, landlords who meet certain requirements laid out by the IRS can ensure that they are able to use the pass-through deduction.
The IRS has established a “safe harbor” rule that allows Colorado residents and other Americans to utilize the pass-through deduction if they keep separate books for their rental properties and can show that at least 250 hours of real estate rental services are performed on the properties each year. The 250 hours do not need to be performed personally by the taxpayer and can include services such as maintenance, cleaning, lease preparation and negotiation, advertisement, collecting and processing rent, as well as other work performed on the business.