If you’re at all familiar with real estate investing, you know that one of the biggest advantages that proponents of real estate investment laud are tax benefits. This benefit, however, can sound vague to anyone who isn’t familiar with tax law or doesn’t handle their own taxes—and let’s be honest, most of us don’t!
With recent tax reform fresh in our minds, we also have to consider how these changes might affect real estate investors. Now is the time to become well acquainted with the tax laws that could affect your investments. Not only do you want to know what benefits you could be taking advantage of, but you want to be able to select the best advisers and accountants available come tax time so that you get the most that you deserve.
Here’s what you need to know—no confusing jargon, no frills—just tax facts.
A Real Estate Guide to New Tax Benefits After Tax Reform
The 2018 Tax Reform presented significant tax law changes that, by and large, present opportunities for real estate investors as well as the average American taxpayer to save more on their taxes. That said, there are some things you will want to be well-acquainted with specifically in regards to your taxes, not simply the reshuffling of tax brackets and income tax rates, though this is also valuable information.
The Pass-Through Deduction
This is perhaps the most significant change with the potential to impact real estate investors. With many real estate investors choosing to protect their assets through an LLC, the pass-through deduction will impact your taxes. This is a 20% deduction applicable to sole proprietors, LLCs and s-corporations, and, by extension, partnership income, rental property income, and trusts that own interests in a pass-through business.
The key is that the income earned (and taxes paid) are not paid by the corporation or business itself but “pass through” and are paid by the owner.
There are limitations on this deduction and details continue to come out as the IRS formalized information. What we do know is that for real estate investors, this pass-through income must be less than $315,000 if married filing jointly or $157,500 for other filing statuses for the full deduction, with maximum taxable incomes of $415,000 for married filing jointly and $207,500 for other filing statuses before there is no partial deduction.
Again, because this is such a newly introduced tax deduction, it is crucial that, if you think you may qualify, you speak with your tax professional about it well before you need to file taxes. You can find more detailed information about this deduction at The Motley Fool.
Expanded Section 179 Savings
The section 179 deduction has long provided benefits to business owners, but starting this year, that deduction can also provide some relief to rental property owners, too. Originally business owners utilized this deduction to comp the cost of purchasing qualifying equipment and software during the tax year.
With expanded rules, property owners can use the section 179 deduction to deduct the cost of personal property utilized in rental properties, like appliances and furniture, as well as certain improvements, like new roofing, HVAC, fire protection, and even security systems. The key is that these costs most revolve around the improvement of the interior of the building.
The full deduction limit is $1 million, with a phase-out limit of $2.5 million.
Of course, depending on your rental strategy, you may not be able to take total advantage of this deduction. Still, it is worth noting and looking into if you are an owner footing the bill for improvements that qualify under the section 179 deduction. You can view the IRS fact sheet about the deduction to learn more.
Mortgage and Property Tax Deduction Limitations on Primary Residences
One of the benefits of owning real estate has historically been the tax breaks and benefits associated with it. Though the 2018 tax reform has brought with it opportunities to save in some areas, there are others that will have homeowners grumbling.
The mortgage deduction allows homeowners to deduct a portion of the cost of their mortgages come tax-time. This is one of the advantages of having a mortgage over paying all-cash. The deduction has had its limit reduced by $250,000, however, from $1 million to $750,000.
Perhaps more painful is that the previously unlimited deduction for state, local, and property tax now has a combined limit of $10,000. This can be especially painful for homeowners who choose to purchase real estate in pricier markets like California and New York. High-price, high-tax locations now hold much more weight than maybe they once did, and the location of your home is all the more important.
Remember, however, that you don’t necessarily need to restructure your investment strategy around these changes.
There is a good chance many will be reversed, revised, or scrapped entirely come 2026—so either enjoy them while you can or make do until then. Our best advice? Find a tax professional with a lot of experience working with and for real estate investors. You want someone in your corner who knows not just tax law, but specifically how to work tax law in your favor.
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