What’s in for the Real Estate Investors under the New Tax Law

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The US Tax Reform is mostly good news for real estate investors as it introduces a couple of new tax breaks and preserves quite a few. In this article we will look at the specific benefits and one negative that the new tax law offers to property owners and investors.

The Benefits

1. Lower Taxes

As you already know the new tax law introduced more tax brackets that are mostly favourable to the ordinary taxpayers. Now the lowest tax bracket is 10% for income up to $9,525 ($19,050 for married couples). The highest is 37% for income above $500,000 ($600,000 for married couples). If you are a real estate investor who owns a property as an individual or as a pass-through venture such as LLC, your income from it will be taxed at these rates.

2. The QBI Deduction

While we are talking about pass-through ventures, here’s another advantage for them coming from the new tax law. That’s the Qualified Business Income deduction (QBI). It’s 20%, but there are specific requirements in relation to the income that need to be met in order to use this deduction.

3. Increased First-Year Depreciation

Real estate investors really got lucky with this one. A large portion of properties placed in service from January, 1st 2018 will be able to use Section 179 deduction. This has now been nearly doubled to $1 million. The eligible properties include improvements to the interior of nonresidential real estate and also furnishing costs. Taking advantage of this tax break can be a little complicated so we recommend you speak to your tax advisor.

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4. First-Year Bonus Depreciation for Qualified Real Estate Expenditure

With this allowance under the new tax law real estate investors will be able to offset 100% of their improvement expenses for qualified properties. These include:

  • Leasehold improvement property
  • Qualified restaurant property
  • Qualified retail improvement property

Again, this is something that you should discuss with your tax advisor to avoid any mistakes.

5. Capital Gains Remain the Same and SALT Deduction Limitations Don’t Apply to Rental Properties

Long-term capital gain tax rates stay unchanged. They continue to be 0%, 15% and 20%. In addition the SALT deduction limitations, which disappointed a lot of homeowners in expensive states, will not apply to rental property. An exception would be if the property is also used for personal purposes. For example, if you own a property in which you live, but also have lodgers, unfortunately you will be affected by the limit on SALT deductions.

6. Tax Deferral is Still Possible

The 1031 like-kind exchanges of real estate also remain as before. This allows investors to defer the taxes on a sale of a property if they exchange it within a given deadline for a similar (like-kind) one.

Funding for Real Estate Projects

The Downfall

1. New Loss Disallowance Rule

Normally when you invest in a property you would have a tax loss for the first or first few years. That means PAL rules apply – you can deduct passive losses to the extend of passive income you have from other sources. Passive losses that are more than passive income (over $250,000 for individuals, $500,000 for married couples) are suspended until you have sufficient passive income or you sell the real estate.

The new disallowance, however, will prevent you from deducting a loss in the same tax year and you will have to carry it to the next. The good news is this rule applies after the PAL rules.

Do you need more clarification on the implications of the new tax law for real estate investors? Get in touch with one of our consultants and get answers to all the questions you have.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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