The largest economic relief bill in U.S. history has passed. With over $2 trillion in relief funding, many are left wondering what’s in it for me? Specifically, what’s in it for me as a real estate investor?
There are many changes that range from tax deadlines and stimulus checks to new tax credits and new depreciation rules. Additional changes include government loan programs, retirement account rules, as well as opportunities to turn tax losses into immediate cash in your pocket.
The changes are still fluid and important details are still being released and clarified on a daily (sometimes even hourly) basis, as the government works through all of the various moving pieces. As such, please consider this important disclaimer: The items discussed in this post may not reflect all of the most current information.
Therefore, make sure to check with your own team of advisors on how these may apply to your unique situation. In the meantime, here are the highlights of some of those changes that you may be interested in as a real estate investor.
Economic Impact Payments
You probably already know a one-time $1,200/$2,400 economic impact payment check is on the way for many taxpayers. Eligibility for the immediate refund check will be based on your most recently filed return (2018 or 2019).
The actual credit will be reconciled on 2020 taxes, so any eligible amounts not received currently may be a credit on the 2020 income tax return.
Below are the payment amounts and income limitations:
If your 2019 income is currently above the threshold and you have not filed your 2019 taxes yet, filing your taxes as soon as possible and maximizing your real estate write-offs, increasing retirement account contributions, or accelerating depreciation to lower your income may be beneficial.
Now, what if these tips do not work for you due to your real estate losses being limited?
The good news is that you can plan ahead and determine if these strategies may be able to lower your 2020 income instead.
For example, if accelerating depreciation in 2019 was not an option because you were not able to claim real estate professional status, then plan ahead for the rest of this year to see if it would be a possibility in 2020. Remember, since the stimulus check will be reconciled on your 2020 tax return, you may still be eligible for the tax benefit if your 2020 income is below the phaseout range.
The IRS website has an Economic Impact Payments FAQs that you may find helpful.
New Tax Deadlines & Payment Deadlines
We previously shared that the IRS and many states have delayed the deadlines for filing and payment of certain taxes to July 15, 2020. Payments that were originally due between April 1, 2020 and July 15, 2020 will not incur any interest or penalties during this period.
You do not need to file any forms to receive the benefit of this particular extension. It is an automatic extension.
If your returns will not be completed by July 15th, you can file tax extensions to receive even more time to file your 2019 taxes.
For example, if by early July you realize that you still need more time to prepare your 2019 personal taxes, you can file personal tax extensions with the IRS by July 15. With that extension, you will then have until October 15, 2020 to file your 2019 personal taxes.
Do keep in mind that any payments due should still be paid by the July 15th deadline. Any amount due that is not paid by July 15 may be subject to late payment penalties.
The IRS has put together a Filing and Payments FAQ page regarding the new deadlines that you may find helpful.
Changes to Retirement Accounts
Several big changes with respect to retirement accounts also came out that we as investors should know.
First, the deadlines for making 2019 retirement contributions to accounts, such as IRAs and Roth IRAs, are now also extended until July 15th. This includes contributions to self-directed accounts, as well. This gives investors more time to assess our liquidity and also more insight into 2020 before we decide on whether to make the contributions.
For those investors who generally need to take required minimum distributions (RMDs), this is no longer required for the 2020 year.
For many who have already taken required minimum distributions, it may be possible to put that money back into the account to avoid taxes in 2020. This benefit is available for regular retirement accounts, as well as self-directed retirement accounts.
Another notable change is the ability for investors to take out up to $100K in distributions from retirement accounts, such as IRAs and 401(k)s. These distributions can escape the 10 percent early distribution penalty—but may still be taxable.
For these distributions, you are able to access the money from these retirement accounts today, but you can spread the associated taxes over a three-year period. Alternatively, if you want to avoid the taxes altogether, you can do that as long as you put the money back into the account within three years.
One important thing to note is that in order to benefit from this new rule, the distribution must be related to coronavirus, where the recipient experienced adverse financial consequences as a direct result of the COVID-19 pandemic.
One of the more talked about tax changes—relating to retirement money—that taxpayers impacted by coronavirus need to know about is the ability to borrow up to $100K from 401(k)s. The new rule allows account holders to borrow up to 100 percent of the account balance, with a maximum loan of $100K.
The 401(k) loans do need to be repaid in order to avoid taxes and penalties, although the repayments do not need to start until 2021. The new loan benefits apply to self-directed Solo 401(k)s, as well.
An important thing to keep in mind is that just because the IRS has these new rules for distributions and loans, it does not mean you should be taking this money out. A lot of costly mistakes can occur when taking money out of retirement accounts erroneously or by not following all of the new rules. So it is imperative that you work with your tax advisor and retirement plan custodian before tapping into that money.
Depending on your 2019 and 2020 financial situation, there may be many opportunities with respect to tax planning around retirement funds.
Stimulus Package Upsides for Landlords
For investors who own rental properties, some of the new IRS changes could turn losses into immediate cash in your pocket. If you had a net operating loss on your 2018 or 2019 taxes, you may now be able to file refund claims by carrying those losses back five years to offset taxes paid in those prior years.
Let’s go over an example.
John started as a real estate broker back in 2014, made a good chunk of money every year since then and ended up paying a lot of taxes each year. In 2019, John focused more of his time on growing his rental portfolio and purchased a handful of properties.
By maximizing his tax write-offs and depreciation, he was able to create a net operating loss of $50K on his 2019 return. Under the new tax changes, John is now able to carry that $50K loss back to 2014 and get an immediate refund for taxes paid back in 2014.
On a similar note, the new tax change removed the excess business loss limitation of $250K/$500K (single/married filing jointly) for years between 2018-2020.
An example may be a real estate professional who did a cost segregation in 2018 who was not able to use all of their losses to offset their taxable income because of this particular limitation. That investor may now have an opportunity to file amended returns to use those excess, unused losses to claim a tax refund.
In addition, for investors who owned nonresidential real estate and who had qualified improvement property additions, these improvements may now be potentially eligible for 100 percent bonus depreciation. Just like the above, this change is also applicable retroactive to 2018 and 2019 tax years.
Outside of income taxes, rental investors may also want to consider applying for the Economic Injury Disaster Loan (EIDL) to help with potential cash flow issues. The loan includes a grant of up to $10K that can be used for eligible expenses. This loan is applied for directly with the SBA and has a loan term of up to 30 years with a maximum loan amount of $2M.
You do not need to own your rentals in a legal entity and can potentially receive this loan even if all your rentals are held in your personal name. For more information on this loan, be sure to check out the SBA’s website.
Keep in mind that this loan is not limited to those who own rental properties and actually applies to many different types of businesses. If you are an active real estate investor, such as a flipper, wholesaler, Realtor, or syndicator, you may also want to check out this loan program. Again, you do not need to have a legal entity in order to apply for the loan, and it is also available to sole proprietors.
If you are a landlord (or have another type of qualified business) who also has employees on payroll, be sure to continue reading this next section.
Stimulus Package Upsides for Active Investors
Flippers, wholesalers, syndicators, Realtors—and some landlords—here’s what you should know. For those earning active income in real estate, as well as landlords or business owners who have employees on payroll, the government has a few new benefits that you may be able to take advantage of.
The first are the new tax credits related to the expanded family medical leave and emergency sick leave. If you continue to pay your employees, the government may provide you with a tax credit of up to $10K per employee if certain requirements are met. Now, we understand that not all real estate business owners have employees.
The good news is that as an owner of your real estate business, the compensation you pay yourself may also be eligible for this tax credit. In fact, even if you are just a sole proprietor and have no payroll, you may still be eligible for this benefit to reduce your self-employment taxes.
The IRS has a FAQ page for more information regarding the new sick and family leave requirements and related tax credits.
The Small Business Administration (SBA) also has another loan that may be extremely helpful for those with an active real estate business. This one is called the Paycheck Protection Program (PPP). This loan is designed to help sole proprietors and businesses (with generally less than 500 employees) pay for payroll and other related costs.
If used for the intended purposes, part of this loan may be forgiven. For example, if all of the requirements are met, the SBA gives you a forgivable loan for paying yourself in your real estate business.
Sound too good to be true? Not necessarily.
There are many rules relating to this loan program, so be sure to speak with your team of advisors before applying for this loan with your bank. For more information, visit the SBA’s page on the PPP program.
This is just the tip of the iceberg. Do keep in mind there is a ton of additional information and restrictions regarding each of these topics, and we have selected some of the most relevant information that may be applicable to real estate investors. And as mentioned, these rules are changing on a very frequent basis.
We hope you find the information to be helpful but do encourage you to connect with your team of advisors to see how these new changes may be beneficial for you.
Questions? Comments? Changes investors should know about?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.