Real estate income under the new tax law?

[Luck_Club]

Does anyone have the details on how real estate income is going to be treated in 2018? I hear something on the radio, but not all the details, about it no longer being taxed at the normal income rate, but at a flat rate.

I look at this as being possibly good or bad, depending on the rate.

[Done]

If you’re filing rental income on Schedule E, good news. Sole proprietors, LLC’s and S corps get to deduct 20% of net rental income (independent of the itemized/standard deduction). The remainder passes through to the 1040 as before, to be taxed at (newly reduced) individual rates. The deduction is limited if you exceed $157.5K taxable income (or $315K married filing jointly). A link posted by jetpack on the tax thread gives details and examples.

https://www.watsoncpagroup.com/SubS.pdf

[Luck_Club]

Quote:

Originally Posted by Done If you’re filing rental income on Schedule E, good news. Sole proprietors, LLC’s and S corps get to deduct 20% of net rental income (independent of the itemized/standard deduction). The remainder passes through to the 1040 as before, to be taxed at (newly reduced) individual rates. The deduction is limited if you exceed $157.5K taxable income (or $315K married filing jointly). A link posted by jetpack on the tax thread gives details and examples. https://www.watsoncpagroup.com/SubS.pdf

Thanks. That is great news. So the first 20% of the net income is tax free, and the rest is taxed at the individual rates. VG.

[Senator]

This is going to make a Great Christmas. I think the law starts in 2018 though.

I wasn't sure it would include a Schedule E, but it seems like it does.

[Weathering]

I have to figure out how to bundle my bond holdings into a business. They function like one (I have employed each bond to go out and perform a function which generates revenue). However, I think that my business of buying bonds still is passive (direct) and income.

Congrats on the Real Estate changes it will be a very happy new year!

[Senator]

I have been reading a bunch of what is out there on rental income. I am not 100% convinces that a rental property, owned by an individual, gets a 20% deduction of the income.

I think if the person gets a K1, they get the 20% deduction. A multi-member LLC, S-Corp, C-Corp, etc. all get K1s.

A single member LLC uses a Schedule E and does not get a K1. A single member LLC is a disregarded tax entity.

[Done]

Here is another CPA’s opinion that individuals with Schedule E rental income qualify for the deduction.

https://evergreensmallbusiness.com/s...ome-deduction/

Quote:

In a nutshell, the Sec 199A Qualified Business Income tax cut gives the owners of pass-through businesses like sole proprietors, partnerships, S corporations and then real estate investors a deduction equal to 20% of qualified business income. This deduction will produce big savings for many pass-through entities and real estate investors. But the deduction comes with some tricky calculations and complicated limitations. To understand and begin planning for the deduction, therefore, you need to dig into the details. What is Sec 199A Qualified Business Income? The qualified business income talked about in Sec 199A—that’s the new section of law that creates the deduction—includes the profit from an active trade or business and then also rental income as long as you operate as a pass-through entity. More specifically, this means your qualified business income includes the bottom-line profits from an active trade or business as shown on the Schedule C form and in box 1 of a partnership or S corporation K-1, the rental income shown on a Schedule E form and in boxes 2 and 3 of a partnership or S corporation K-1, and then not the capital gains but rather the Sec. 1231 gains that may occur when a business sells assets used in the business.

[Senator]

If true, this is great news - for a time. It may encourage others to be landlords, which will create more competition and lower rents. Landlords will be able to rent for less, and still make money. Probably more housing will become available as rental are built.

Look for a great time to invest in RE if the landlord taxes go back up.

[pjigar]

Quote:

Originally Posted by Senator I have been reading a bunch of what is out there on rental income. I am not 100% convinces that a rental property, owned by an individual, gets a 20% deduction of the income. I think if the person gets a K1, they get the 20% deduction. A multi-member LLC, S-Corp, C-Corp, etc. all get K1s. A single member LLC uses a Schedule E and does not get a K1. A single member LLC is a disregarded tax entity.

Some of what you read may be confusing due to the fact that the language for pass-thru business was revised. Final bill included real estate investments explicitly among other things.

[Cobra9777]

I'm down to one small rental house, so this is not a big deal for me. But if true, then obviously I'll take it. Helps make room for more Roth conversions inside the 12% bracket... and over time, that's big deal.

[Luck_Club]

Quote:

Originally Posted by pjigar Some of what you read may be confusing due to the fact that the language for pass-thru business was revised. Final bill included real estate investments explicitly among other things.

True story and what might happen because of the new tax law. I bought & owned two rental properties, while get this, renting! I got out fairly early in the real estate run up, and decided to rent for a year before buying in a different location. During that 3 year period we bought 2 properties that we rented out, while we rented from someone else.

Why would someone do that you might ask? We couldn't find a similar property that was at or below rental cost. Now after the new tax law you could even pay a slight premium on the identical house next door to yours, and come out ahead by renting your house vs living in the house you bought.

[wolf]

Hope it is true. Heard about it. Saw a newspaper article said it applies to Rental property also. Hm.....20% deduction...Sounds to good to be true.

However, would not be surprised if in the fine print, they take away depreciation deduction or something. Revenue neutral philosophy.

[rkser]

I do not understand how my situation will be looked at -

We have a Office Building with Three Tenants, DW has the building in a LLC & its income passes thru our Tax Return, i.e The LLC does not file its own Tax return.

Will we be able to deduct the 20% of its income from Taxes. ?

[gerntz]

Quote:

Originally Posted by wolf However, would not be surprised if in the fine print, they take away depreciation deduction or something. Revenue neutral philosophy.

Well, that depreciation comes back to bite you upon sale.

[FIREd_2015]

Does anyone know if the 20% deduction also reduces MAGI (for purposes of determining ACA subsidy) or is the deduction done after the MAGI calculation. I'm trying to figure out how much taxable income I can have next year before falling off the ACA subsidy cliff.

[Done]

Quote:

Originally Posted by FIREd_2015 Does anyone know if the 20% deduction also reduces MAGI (for purposes of determining ACA subsidy) or is the deduction done after the MAGI calculation. I'm trying to figure out how much taxable income I can have next year before falling off the ACA subsidy cliff.

The deduction is not included in AGI or MAGI. It applies “below the line” to reduce taxable income, whether or not you itemize.

[wolf]

Quote:

Originally Posted by gerntz Well, that depreciation comes back to bite you upon sale.

Agree. Depreciation is only postponed. However, in my case, here in California. My plan is to leave rental to heirs. Receive the step up in basis.
And the whole depreciation process starts over at the step up in basis rate.
(you do not have to pay for the depreciation you took in prior years.)

[gerntz]

Quote:

Originally Posted by wolf Agree. Depreciation is only postponed. However, in my case, here in California. My plan is to leave rental to heirs. Receive the step up in basis. And the whole depreciation process starts over at the step up in basis rate. (you do not have to pay for the depreciation you took in prior years.)

I didn't realize that angle. Thanks. But I doubt I want to be in the rental business till I croak. Now maybe if the son runs.........

[Done]

Quote:

Originally Posted by wolf Agree. Depreciation is only postponed. However, in my case, here in California. My plan is to leave rental to heirs. Receive the step up in basis. And the whole depreciation process starts over at the step up in basis rate. (you do not have to pay for the depreciation you took in prior years.)

By the way, in a community property state, the same applies if one spouse passes. If the real estate was held as community property, the surviving spouse gets a full step up in basis. Not that I’d wish that on anyone, but it might apply where there is an age difference or illness.

[Senator]

You can also take a rental and turn it into a personal residence. There is no step up in basis for that either.

If you sell, the capital gains/recapture are pro-rated between business personal. Rent it for 5, reside in in for 5, and you only pay back half the depreciation recapture.

You can sell a rental (or two or three), do a 1031 to a future single retirement home. Rent it out for 2 years and move in. After 10 years, you only have to pay recapture/CG tax on 20% of the total.

There are lots of ways around the recapture tax. If the land went up faster in value than the building, a higher percent of the gain when you sell will be capital gains, not depreciation recapture.

Currently, you pay your regular tax rate on the depreciation recapture, up to a maximum of 25%. If you saved 28% in federal, plus state taxes, then move to a state tax free state, it may work in your favor too, I am not 100% sure on that.

I know if you do a 1031 from a state tax state, to a state tax-free state, then sell, you avoid the state income tax on the recapture.