Now that the 2017 tax filing period has come and gone, it’s time for most individuals to focus on tax planning for 2018 and future years. So, it is important to take note of the changes that’ll affect real estate investors. One of the biggest changes that could potentially affect real estate investors is the new Sec 199A deduction for qualified business income (QBI). This is a 20% deduction on all QBI that comes from a pass-through entity (LLC, Partnerships, S-Corporation & sole proprietorships). As mentioned above it’s only a potential deduction for real estate investors because the IRS has yet to provide additional clarification regarding the new tax law, specifically if passive income earned from real estate properties will qualify for this deduction. In addition, restrictions can apply if taxable income exceeds the thresholds of $157,500 for single filers and $315,000 for married filing joint filers.
The new tax law provides for a more accelerated bonus depreciation to those qualifying improvements, equipment, furniture etc. You can now depreciate 100% of the value of these items in the year they were placed in service until the year 2022. In addition, if you have a smaller vehicle (not truck or SUV) that you use to maintain your properties, you can now take a higher amount of depreciation in the first 3 years of the vehicle being placed in service. The depreciation for larger vehicles remains unchanged and doesn’t have the same restrictions as smaller vehicles.
An item that could potentially negatively affect your real estate investment is if the property is heavily financed and pays a large amount of interest. The new tax law limits the allowable interest deduction to 30% of earnings before interest, taxes, depreciation and amortization (EBITA).
Another change that will affect everyone is the lower tax rates for both those who have their real estate investments in a pass-through entity or those that may have it in a Corporation. The Corporation rate changed to a flat 21% tax but isn’t eligible for the 20% pass through deduction. The personal rates decreased across the board.
Many of the items mentioned above are general rules and may have additional restrictions or requirements. They all require careful tax planning to maximize the benefit. If you would like a closer look at your specific tax situation please contact Josh McLain, CPA at Corporate Capital 884-249-5501 or at firstname.lastname@example.org.