I wrote an article last November about how the proposed tax bill could greatly benefit real estate investors. While a few things have changed between the initial bill and the approved bill, what hasn't changed is the fact that landlords can benefit greatly from the new tax changes. Let's take a look at what the official rules are for 2018:
1. New Pass-Through Tax Deduction (IRC Sec. 199A)
Although poorly written and overly complicated to calculate, this should undoubtedly be one of the biggest considerations for investors during their yearly tax planning. To oversimplify (for the sake of all non-CPA readers), residential landlords who own their properties through pass-through entities (or as sole-proprietors) are entitled to a new tax deduction that could be as much as 20% of your qualified net rental income. I would, however, like to make two quick notes regarding this deduction:
- For those of you who 1) file single and have taxable pass-through income at/above $157,500 or 2) are married filing jointly and have taxable pass-through income at/above $315,000, you are subject to a phase-out of this deduction.
- Again, this is extremely complicated to calculate. It's imperative that you work with a competent tax CPA to calculate your deduction, especially if your income falls into the phase-out limits listed above.
2. Expanded Section 179 Expensing
Like I had mentioned in my last article, the IRS is now allowing increased Section 179 expensing. In layman's terms, landlords are now allowed to immediately expense up to $1m of "personal property" used in their rental business. This specific tool for expensing has never been available to landlords until now. Landlords who are purchasing new appliances for vacated units or provide furnished rentals can annually expense their purchases up to $1m instead of having to depreciate those purchases over the years. So for anybody who's been waiting to rehab their units, 2018 is an excellent year to make upgrades. Please consult with a CPA about which purchases qualify for Section 179 Expensing.
3. Lower Individual Tax Rates
Along with additional tools to help lower your taxable income, the new tax laws also reduce individual tax rates. Since rental income is taxed at your individual rate, landlords get another break here. See below for the new rates for 2018:
There are other new tools for landlords that I didn't mention in this article such as Increased 100% Bonus Depreciation. For those of you who own rental property, it's important for you to get up-to-speed on how to take advantage of these new tax benefits before they're gone. If you have any questions regarding an overall tax strategy for your real estate investments, please give me a call or email! I'll be happy to help point you in the right direction.
Disclaimer: Although I still maintain an active CPA license in the state of California, you SHOULD NOT rely upon the tax advice in this article until consulting with your own tax CPA. Everyone's situation is unique, so you must consult with a qualified tax practitioner to receive the right advice for you.