If you are like me, you are probably still scratching your head trying to make sense of all the changes under the TCJA (Tax Cuts and Jobs Act). I wanted to know how the new tax changes could impact my rental property investments as well as me personally. I also wanted to know how to manage my business and personal finances in order to minimize taxes.
I’ve compiled a collection of the best articles that do a great job of clearly explaining the implications of the TCJA impact on real estate investments and you personally.
This article will take you through the 7 different changes that you need to understand if you want to prosper in this new tax era.
Disclaimer: Accidental Rental is not a tax service nor am I a tax expert. The information in this article is intended for informational purposes only. It is not intended to be tax advice. You should definitely consult a tax professional to understand the impact of the new tax changes on your personal situation.
1 – Things Got Complicated For Pass-Through Income Entities
The most complicated changes to come from the TCJA have to do with Pass Through Income. Business entities like LLCs and S-Corps were designed to provide liability protection without the dual taxation of a C-Corp.
The new lower corporate tax rates implemented in the tax reform would have rendered the Pass-Through concept meaningless without a fix. Why pass through to a higher tax rate? So congress provided a new deduction for small businesses. 20% of net income from pass-through entities is deducted before being taxed.
But this new deduction comes with a whole new set of rules and restrictions. Forbes has an awesome article explaining the concept of pass-through income along with examples to illustrate the new changes.
Kelly Phillips Erb, Forbes
So Should You Incorporate To Save Taxes?
With all of these changes in pass through income, now is the time to consider a change in company structure of your rental property business.
Again, Kelley at Forbes does an excellent job of breaking down several scenarios where you may or may not want to consider incorporating your rental property business.
Kelly Phillips Erb, Forbes
2 – What Capital Investments Qualify For 100% Deductions?
Section 179 essentially allows businesses to expense the entire cost of certain equipment in the year purchased instead of depreciating it over a number of years. This gives business owners a bigger tax cut if they purchase qualified equipment.
The TCJA expanded the utility of Section 179 deductions when it comes to landlords. Both the amount and what qualifies for a full deduction has been expended to include things like HVAC systems, roofs and security systems. For more information on all things Section 179 visit the folks who know at Section179.org.
3 – No More Entertainment Expenses?!?
Don’t worry. You still get to deduct 100% of the cost of the annual office holiday party. But there are big changes if you are entertaining clients. Here is a great chart by DoerenMayhew CPA’s and Advisors, explaining the changes.
Mark Kruczek, DoerenMayhew CPA’s and Advisors
4 – Dude, Where’s My NOL Carryover?
Relax. It’s still there. However, there were significant changes to how much can be deducted and when you can deduct Net Operating Losses. Learn about the changes if you have NOL’s just waiting to offset future profits.
Nick Gruidl, RSM
5 – How Did The Like-Kind Exchange Rule Change?
Most Section 1031 Like-Kind Exchanges are no longer allowed under the TCJA. Read this article by IPX1031 to see if you are impacted.
6 – Cut Your SALT (State And Local Tax) Deductions
You’ve heard a lot about new limitations on the so-called SALT deduction (State And Local Tax). There is a lot of confusion as to whether it impacts investment properties. This article will clarify the SALT situation for you versus your business.
7 – Why Some Experts Believe House Prices Could Be Impacted
Opinions are mixed as to how much home prices could be impacted but one thing seems clear according to experts – prices will be impacted. If you own a property in a state impacted by the new SALT limits due to high property and/or state income taxes, your home prices could suffer more than others. I’m looking at you New Jersey.
Here are a couple of interactive maps with different predictions for each state or market.
But Wait There’s More! A Summary Of What The TCJA Did and Did Not Change For Real Estate Investors.
The Final version of the TCJA was signed into law on December 22, 2017. Prior to that, there was a lot of debate surrounding several provisions that could impact real estate investors. This article from Amanda Han at Bigger Pockets does an excellent job of summarizing what the TCJA did and did not change.
Make no mistake, the TCJA will have a significant affect on the real estate industry. Some provisions are temporary while others are indefinite. Overall, the TCJA impact on real estate is good for landlords, even if it is not good for individuals in certain high-tax states.
The seven changes listed above have the potential to change the real estate game for some investors. Every investor needs to understand how the new tax laws impact their business and themselves personally. Doing so will help you organize your business in a way that maximizes rental property tax deductions.
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