Congress just passed major tax revisions to go into effect on January 1, 2018. So how will these changes affect your rental(s). As always, we encourage you to meet with your tax advisor to help you make wise decisions for 2018.
NAR – National Association of Realtors Update
While there is concern that the overall structure of the final bill diminishes the tax benefits of homeownership and will cause adverse impacts in some markets, the final legislation will benefit many homeowners, homebuyers, real estate investors…
There has been confusion around the cap of 10,000 for State and Local Property Taxes. This cap applies only to personal residences. It does not apply to rental properties. The final bill includes some big successes such as the exclusion for capital gains on the sale of a home and preservation of the like-kind exchange for real property.
As a result, of the changes made throughout the legislative process, NAR is now projecting slower growth in home prices of 1-3% in 2018 as low inventories continue to spur price gains. However, some local markets, particularly in high cost, higher tax areas, will likely see price declines as a result, of the legislation’s new restrictions on mortgage interest and state and local taxes.
This may cause potential buyers to wait and continue to rent since the incentive to buy has diminished. This is good for the rental market.
The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).
The final bill retains the current Section 1031 Like Kind Exchange rules for real property. It repeals the use of Section 1031 for personal property, such as art work, auto fleets, heavy equipment, etc.
Cost Recovery (Depreciation) The final bill retains the current recovery periods for nonresidential real property (39 years), residential rental property (27.5 years) and qualified improvements (15 years). The bill also replaces separate definitions for qualified Restaurant, Leasehold, and Retail improvements with one definition of “Qualified Improvement Property.”
Rental Income Subject to Self-Employment Tax – The House-introduced bill would have subjected rental income to self-employment taxes. This provision was dropped from the House (and final) bill.
The New Tax Law – Major Changes in Store for Landlords
Stephen Fishman, J.D. stated in his article for NOLO, “Landlords are among the biggest winners under the new law. Virtually all landlords will save money--many, to quote our President, will save “bigly.”
For landlords, the most stunningly good provision of the TCJA (Tax Credit Jobs Act) is a new tax deduction for owners of pass-through businesses. This includes the vast majority of residential landlords who own their rental property as sole proprietors (who individually own their properties), limited liability companies (LLCs), and partnerships.
The TCJA creates a brand new tax deduction for individuals who earn income through pass-through entities (new IRC Sec. 199A). If your rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct an amount equal to 20% of your net rental income. This is in addition to all your other rental-related deductions. If you qualify for this deduction, you’ll effectively be taxed on only 80% of your rental income. Thus, the effective rate for taxpayers in the top 37% tax bracket is 29.5%.
To read the full article…. https://www.nolo.com/legal-encyclopedia/how-the-republican-tax-plan-affects-landlords.html
So how can we actively help you this year?
We are happy to work with you to address maintenance/improvements for 2018.
We can set up a plan with you to reserve money on a monthly basis to budget for maintenance/improvements
We can provide you with monthly financial statements that with the advice of your tax advisor can help you take advantage of the new tax laws this year.
Now that we have reviewed, many of the new tax laws going into effect we look forward to our continued partnership in helping you maintain your investment and give you peace of mind.