How U.S. Real Estate Investors Can Reduce Their Taxes Thru the New Tax Reform
The Trump tax reform or the Tax Cuts Jobs Act (TCJA) created a new 20% business income deduction thru the 199A deduction section of the internal revenue code or IRC. The 20% business income deduction applies to pass-thru companies such as Partnerships, LLCs and S Corps.
There are a few conditions and exclusions for taking this deduction:
- Business income from health, law, accounting, actuarial services, artists, consulting, athletic, financial services or brokerage services, 20% business income deduction is limited to the income of the business owners, which should not be over $315K oh their tax return for MFJ or $157.5K for singles.
- Business income from real estate and any other activity, 20% business income deduction is limited to the lesser of the 20% business income deduction and the greater of the 50% of the W2 wages of the business owner or the sum of the 25% of the W2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
Real Estate business owners need to pay attention to their unadjusted basis in property to maximize their 20% business income deduction. Some may need to buy the property they rent or shift the debt to different properties if they own multiple buildings or re-leverage debt to maximize their unadjusted basis. Remember that debt reduces your basis.
If you have W2 income from other businesses apart from real estate, now is the time to determine if you need to decrease your W2 salary to avoid the limitation of the 20% business income deduction or the opposite if you have no W2 salary. Lack of W2 wages can limit you from taking the 20% business income deduction, but keep in mind that if this is not done under the internal revenue code limits, you may be in for an audit next year. The IRS has audited S Corps whose owners have not paid themselves a salary but take only their business income as pass-thru profits.
The points to consider on your tax plan are
- Individual’s income,
- Business structure,
- W-2 employees,
- Property ownership
If you are a real estate owner and your AGI is over the limits for the 20% business income deduction, you may use tax shelters such as IRAs or 401K, to reduce your income and be able to take the maximum of the 20% business income deduction.
For example, if your business income at the end of the year is $170K and you are single, you are not able to take the 20% business income deduction (because the $157.5K limitation), but if you set up a 401K or SEP IRA, you can defer up to $55K (for 2018 if you are under 50), your business income is under the threshold and therefor you qualify for the 20% business income deduction and in addition save for retirement. If your income is over $170K, let say $250K, a Defined Benefit Plan will allow you to shelter up to $100K and reduce your tax liability as well as save for retirement.
In view of the tax changes, we are reviewing our clients’ financials to recommend the most suitable tax strategy for this fiscal year. Reach to us if you want to be reduce your taxes and plan for the future.
Contact us, we will glad to give you all information on how to plan for taxes for real estate investors.
Like this article? Join our Real Estate Tax Linkedin Group: U.S. Real Estate Tax Intelligence
Request a Confidential Consultation
FAS CPA & Consultants
9000 SW 137 AV Suite 224 Miami, FL 33186 T: 786-462-7899 E: firstname.lastname@example.org