How Real Estate Investors Will Get 20% Business Income Deduction from The Trump Tax Reform
The IRS finally issued its guidance on the 20% business income deduction for pass-thru entities such as LLCs and S Corps. The good news is that Real Estate investors will be able to get this deduction. Accounting today posted an article as well as Forbes with an extensive detail of the regulations. Below there is a summary of the most relevant information:
- Real Estate Investors will be able to deduct 20% of their business income from LLCs and S Corps if they participate 250 active hours during the year involved with their real estate business and keep records of their activities.
- Income from originating and selling mortgages is eligible for the deduction.
- Shareholders of mutual funds with real estate investment trust investments can get the deduction.
- Individual REIT investors through mutual funds are eligible for the same 20 percent deduction as direct investors with respect to their qualified REIT dividends.
- 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 such as LLC and S Corps from their overall taxable income.
- Real Estate Investors who earn above those amounts must meet certain tests to take the full deduction: how much you pay in employee wages or how much you have invested in real estate (deduction is the greater of):
- 50% of the taxpayer’s share of the W-2 wages with respect to the qualified trade or business, or
- The sum of 25% of the taxpayer’s share of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the taxpayer’s share of the unadjusted basis immediately after acquisition of all qualified property.
- Add 20% of qualified REIT dividends and PTP income.
- A long-time building owner may not be able to get the tax break, while newer buyers might be able to get the deduction because they’ve invested more capital in the building. This is because the long time building is carrying more depreciation that reduce the basis of the property for the 2.5% taxpayer’s share of unadjusted basis as above
- Safe Harbor for Real Estate: commercial properties cannot be grouped with residential properties and they will get the 20% deduction only if the owners keep:
- Separate books and records,
- 250 hours or more are performed per year, and
- Records regarding services performed for:
- Dates, and
- Who performed them
Real Estate Safe harbor cannot be used for any property rented on a triple net basis (tenant pays all expenses such as real estate taxes, insurance and maintenance).
- Self-rental is granted 20% deduction if property is commonly controlled:
- property is rented to an individual or pass-through but not to a C Corp,
- Owner(s) must own 50% or more of both the property and business.
- Self-rental must file 1099s forms.
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