An official with the National Association of Real Estate Investment Trusts, or Nareit, said the IRS guidance was welcome news confirming that individual REIT investors through mutual funds are eligible for the same 20 percent deduction as direct investors with respect to their qualified REIT dividends.

The proposed regulations also provide guidance for taxpayers who hold interests in regulated investment companies, charitable remainder trusts and split-interest trusts, the IRS said in a statement.

The agency also put in a test for rental real estate owners to know if they can get the tax break. Property owners can get the tax break if they -- or someone they hire, such as a contractor -- spend at least 250 hours a year on the business and keep records of their activities.

Small Businesses
The pass-through deduction was included in the overhaul to give a tax break to businesses whose owners pay the taxes on their personal tax returns -- partnerships, limited liability companies, and S corporations. Trump and Republican leaders have said that middle-class Americans and small businesses would be the biggest beneficiaries under the $1.5 trillion tax cut.

All taxpayers who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via pass-through businesses from their overall taxable income. If taxpayers earn above those amounts and aren’t service professionals -- such as lawyers or accountants; they must meet certain tests to take the full deduction -- the size of their deduction depends on how much they pay in employee wages or how much they’ve invested in capital like real estate.

For service professionals, the break fully phases out if they earn more than $207,500 if they’re single, or $415,000 if they’re married.

No ‘Crack and Pack’
The rules make clear that companies can’t use a tax planning technique called “crack and pack” to avoid limits on the new tax break. Professional service providers had eyed the break to get around the income limits set for owners of pass-through businesses.

The strategy would have allowed them to split their firms into different entities to lower their tax bills. For example, a law firm could have put all of its secretarial staff into one entity and its lawyers into another to get the full deduction on the income tied to the administrative work.

But companies with some income that qualifies and some that doesn’t can still delineate those different activities, such as through separate accounting books, to get the deduction on the eligible income. For example, banking activities qualify for the deduction but wealth management advising doesn’t, so a bank with some investment advising can separate the bookkeeping for those two units and still get the deduction on the qualifying income.

Simpler Record-Keeping
The deduction is limited for employers who pay low wages or hire few workers. The rules make it easier for related pass-through businesses to maximize their deduction by allowing companies to combine at the entity level or at the owner level. For example, two related businesses -- one with a lot of employees but little profit, and another with a lot of profit but few wages -- could aggregate their payroll and income to get a bigger tax break.