An issue that has confused taxpayers since the IRS has issued guidance on IRC §199A is whether a taxpayer has to treat commercial and residential rentals as different trades for businesses, especially in the context of mixed-use property. Tax Notes Today Federal reported on comments from Holly Porter, IRS associate chief counsel (passthroughs and special industries) where she said that such combinations were not prohibited under the general rules for determining the trades or businesses of a taxpayer.
The IRS had included a prohibition on combining commercial and residential rentals into a single enterprise under the proposed safe harbor test regarding whether a rental is a trade or business under Notice 2019-07. Since it is only a safe harbor, not being able to come under its conditions did not necessarily mean that the undertaking could be a trade or business—just that the taxpayer could not use the safe harbor to establish it was a §162 trade or business eligible for the 20% §199A deduction.
As well, the IRS in Example 17 found at Reg. §1.199A-4(d) had provided that residential and commercial properties were not the “same type of property” for purposes of the election to aggregate multiple trades or businesses under §199A. Again, this only applied to activities already determined to be a trade or business, so it did not clearly indicate that commercial and residential properties could not be part of the same §162 trade or business for §199A reporting.
But some advisers were concerned that these pieces of guidance indicated that the IRS was taking the view that commercial and residential properties could never be part of the same trade or business purposes of §199A.
The Tax Notes Today Federal article reported on Ms. Porter’s comments at the New York University Real Estate and Partnerships Tax Conference in Washington that indicated this was not necessarily the case. The article provides:
Commercial and residential property within the same building can be treated as a single trade or business for purposes of the passthrough deduction, according to an IRS official.
For example, a building with a grocery store on the ground floor and residential apartments above it could be considered one business under section 199A, Holly Porter, IRS associate chief counsel (passthroughs and special industries), said June 27 at the New York University Real Estate and Partnerships Tax Conference in Washington.
The determination depends on the facts and circumstances, but it is possible, Porter added.
 Eric Yauch, “Mixed-Use Property Could Be One Business for 199A Purposes,” Tax Notes Today Federal, June 28, 2019, https://www.taxnotes.com/tax-notes-today-federal/partnerships-and-other-passthrough-entities/mixed-use-property-could-be-one-business-199a-purposes/2019/06/28/29nw5 (subscription required), retrieved June 29, 2019