As the end of 2018 quickly approaches, real estate investors and landlords are reviewing records in preparation for filing tax returns. The tax reform bill, known as the Tax Cuts and Jobs Act, enacted sweeping changes to the Internal Revenue Code that will apply to 2018 returns. Real estate investors and landlords stand to benefit from many of the new law’s provisions. It is important that year-end planning address these changes.
Unlike changes to the individual tax structure, which are temporary and somewhat piecemeal, the changes to the business tax structure are permanent and relatively comprehensive. The new law is complicated, creating many questions among those affected. Here are some of the provisions that apply to landlords and real estate investors:
New Pass-Through Tax Deduction
The pass-through deduction will benefit residential landlords who own rental properties as sole proprietors, limited liability companies (LLCs), and partnerships. Profits earned from the rental activity is "passed through" to the individual tax returns of the owners who pay tax on it at their individual income tax rates.
Lower Individual Tax Rates
As mentioned above, almost all residential landlords pay income tax on their rental profits at their individual tax rates. The TCJA reduces these individual rates beginning in 2018.
Bonus Depreciation
Beginning September 29. 2017, assets with a useful life of fewer than 20 years will qualify to be 100% expensed through bonus depreciation. While you cannot 100% expense a rental property, due to a higher useful life (27.5 years), you can expense certain assets within and on the property.
- Appliances
- Carpet
- Computers and software
- Equipment and tools
- Land improvements (landscaping, driveways)
Rehabilitation Tax Credit
For real estate investors who are developing older buildings, the 10 percent credit for pre-1936 buildings has been eliminated. It is now limited to certified historic structures, where a 20 percent credit is applied.
Not all provisions have been changed. Here are some that are the same:
- Property Depreciation. There is no change to property depreciation in this bill. The useful life of residential rentals and commercial property is 27.5 and 39 years respectfully.
- Rental Income. There is no change to the self-employment tax rules. Landlords remain exempt from having to pay Social Security and Medicare tax on their rental income.
- Itemized Deductions. Rental property owners can still deduct business expenses from the rental properties. For owners of primary and secondary residences, home equity debt cannot be deducted unless the proceeds are used to purchase or improve rental properties.
Almost all these and the many other changes in the new tax law are complicated and may affect companies differently. Landlords and real estate investors should consult their tax professional to understand the impact and scope of these changes before making decisions about future investment opportunities.
