How The Landmark 2018 Tax Laws Benefit Real Estate Investors

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Real Estate investors looking for some good financial news in these turbulent times are in luck — thanks to the new 2018 tax laws that have now been fully enacted, investors are discovering that now is the time to buy. 2018 rental property tax deductions are one reason for this, as they can be used together with 2018 standard deductions. This allows for more positive monthly cash flows. How else can an investor benefit from the new tax laws? 

How Real Estate Investors Benefit

When it comes to buy and hold real estate, the qualified business income deduction is now a 20 percent tax deduction on the person’s taxable income. As a result, investors will be able to write off portions of their investment properties. For instance, any passive income generated by a rental property should lead to additional deductions for the investor. As a result, he or she makes more profit.

199A

Sole proprietors, S-corporations and LLCs find they can avoid taxes by passing the income on to the owner. An investor who has purchased real estate through an LLC may find he or she is able to save significantly as a result.

Controlling Taxable Income

Individuals who can keep their taxable income at or below $157,500 and couples who keep it at or below $315,000 can benefit from this 20 percent deduction. To accomplish this goal, income may be transferred to a C corporation, allowing the investor to likewise get the benefits of the 21 percent flat tax. Charitable donations may be of help in reducing income, and investors should make full use of retirement accounts to save on taxes.

Bonus Depreciation

Anything that will fully depreciate in less than 20 years should be fully written off the first year. For instance, a new water heater has an average lifespan of 12 years, thus it can be entirely written off during the first year. Home improvement projects needed when a tenant leaves a property might be written off in this way, allowing the homeowner to earn more from the property. However, this measure is only in place until 2023. At that time, the amount allowed to be written off the first year is 80 percent and it is expected the rate will drop further in subsequent years.

Combine Section 121 and 1031 Exchange

Consider deferring some taxes when selling a home for a profit by making use of the 1031 exchange. For instance, if you lived in the home for only a short period of time such as two years, Section 121 allows you to pay only a portion of the taxes owed. Obtain a rental property and benefit from the 1031 Exchange as this allows you to avoid tax on the sale of the home. Property owners in areas with a real estate market known for high prices especially benefit from this tax change.

Rental Property Landlords

Rental activity can be considered a business, thus rental property landlords may also benefit from 199A. In fact, up to 20 percent of the net rental income could be deducted using this provision. When combined with other deductions, a landlord finds he or she achieves significant savings on their taxes. Be aware that certain qualifications must be met before this deduction may be used.

C Corporations

C Corporations find they can better control income to take advantage of these deductions. Income may be transferred to reduce the tax burden by lowering income levels. Furthermore, landlords who choose this business structure find they aren’t required to pay self-employment tax.  Those who don’t offer substantial personal services to their tenants find they are not required to pay Social Security or Medicare taxes on any income earned from the rental properties as well.

The Corporate Rate Tax

Thanks to the significant decrease in the corporate rate tax, now is the time for real estate investors to consider setting up their business as a corporation. Doing so could allow the investor to save 14 percent on his or her taxes thanks to this change in tax law. However, take care to ensure the income is structured correctly to obtain the most benefit. Speak to a tax advisor if there are any concerns in this area.

Steps Every Real Estate Investor Needs to Take

Countless individuals are confused by these new tax laws and how they are personally affected by them. The one thing to take away from this is real estate investors have many opportunities to benefit from these changes by capitalizing on the deductions. To do so, however, certain steps need to be taken.

Real estate investors need to carefully plan their schedule A and seek outside assistance if needed to ensure no deductions are overlooked. Furthermore, income needs to be controlled. This can be done in a variety of ways, such as by increasing charitable donations, putting more into one’s retirement account, or leveraging C Corporations. When income is properly controlled, many investors find they are able to take advantage of the 20 percent deduction. Finally, evaluate the current business structure to see if it is appropriate. Compare C Corporations, S Corporations, LLCs, and Sole Proprietorship to find the right structure for the situation.

Some tax benefits will expire in 2025. For this reason, every real estate investor needs to take full advantage of them now. Many find doing so allows them to expand their real estate holdings in their overall investment portfolio.

Although it has yet to be determined how the new tax laws will truly play out, several of the changes are of great benefit to those in real estate investing. This is particularly true for investors and landlords who choose to purchase properties using an LLC as they are able to obtain this real estate, increase their passive income, and reduce their taxes while doing so.

However, it is crucial to remember many of the changes are no longer in effect after 2025. Now is the time to speak to a tax advisor and investment consultant to benefit from these changes and boost one’s real estate portfolio. The sooner this is done, the better off the investor will be in the future.

Matthew Callahan