What Will Happen to Real Estate Tax Loopholes Now That the Election is Over?

by | BiggerPockets.com

With the election over, many of you may be wondering how the new changes in Washington impact those of us as real estate investors. Specifically, will we get to keep the wonderful tax breaks that we have enjoyed in the past as real estate investors? What potential pitfalls may come with some of the proposed changes from Washington?

The truth is that it is still anyone’s guess as to what the new tax changes will be. It is still too soon to tell what the final tax proposals will be and which ones will ultimately be signed into law. Will there be any significant changes to the tax law before the end of the year? If you ask me, it is very unlikely. We do, however, expect to see some major tax changes as early as 2017.

Let’s take a look at what the initial tax reform proposals may be and consider what that could mean to investors like us.

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Income Tax Brackets for Individuals

The proposal cuts down the highest personal income tax rate from 39.6% down to 33%, so this is a benefit for those investors in the higher income brackets. However, for investors who may have been in the lower income tax brackets, it is possible that the lowest 10% bracket may be taken away and replaced instead by a 12% bracket.

Itemized and Standard Deductions

With the proposal to increase standard deductions and putting in place a cap on itemized deductions, the result is that the primary home interest deduction may be less impactful for many home owners. For example, if you are single, the current standard deduction for the 2016 year is $6,300; however, if you own your primary home and your mortgage interest and property taxes total $10,000, then you would itemize instead.

Under the proposed changes, the standard deduction would increase to $15,000 for single filers. Therefore, you would get a $15,000 deduction without even needing the mortgage interest or property taxes. Although this may not necessarily impact the taxes of real estate investors, what it could mean is that more people may decide to rent instead of purchasing a home since there would be decreased incentives to purchase. This can potentially mean higher demand for rental real estate, which can be a win for certain long-term hold investors, in my opinion.


Related: The Most Flexible & Tax Efficient Way to Structure a Partnership

Capital Gains

We will likely get to keep the preferential capital gains tax rates when we sell rental properties, and that rate may even be lowered further. This is a win for real estate investors, especially if you are in a high tax bracket because for those in the highest 39.6% tax bracket, the sale of a long-term rental would only be subject to 20% tax.

Net Investment Income Tax

This is likely to go away. While this does not affect investors who make less than $250k, this can be helpful for higher income investors who have been paying the additional 3.8% tax on interest from note investments, capital gains on sale of rental real estate, and also rental income. This is a good thing for most investors since many real estate investments are subject to this additional tax.

Alternative Minimum Tax (AMT)

Many of you high earners have probably seen this pesky tax pop up now and again. AMT is an alternative tax calculation that adds back deductions such as state taxes, property taxes, net operating losses, investment interest expense, and depreciation and assesses an additional tax. Fortunately for high earners, this may be repealed as well.


Entity Structuring Considerations

There were many significant changes in the initial proposals with respect to the taxation of legal entities that we as investors need to be aware of. Let’s take a look at some of these and how they may impact us:

C Corporation Tax Rates

Tax rates for C Corporations may be lowered from 35% to 15%. Due to historical higher corporation rates and double taxation, few investors have benefited from C Corporations in the past when it comes to taxes. However, with the new proposals of lowering C Corporation taxes, it may make sense for certain higher income individuals to now consider C Corporations as part of their real estate entity structure.

For example, if you were flipping real estate in your personal name and your personal tax rate is 33%, it could make sense to shift your real estate into a C Corporation and pay 15% tax rate instead. Once we find out if there are changes to dividend tax rates, we will then be able to take a good look at whether it makes sense for certain active investors to consider entity changes in the coming years.


S Corporations/Partnerships/LLCs

Currently, income earned in flow-through entities is not subject to income taxes at the entity level. Instead, the income flows through directly to the entity owners, and income taxes are assessed at the owner’s level. Under the new proposed tax changes, these flow-through entities may now be subject to taxation of 15%. Is this good for investors? Well, it depends.

Related: How Retirement Contributions Are Saving One Real Estate Investor $53K in Taxes

If the proposal indicates that the maximum rate at the entity level will be 15% and there will be zero taxes once the income flows through to the individual, it can be extremely beneficial for those investors who are in higher tax brackets personally. For example, if you are in the 33% bracket personally and you own your rental in an LLC, currently you would pay 33% taxes on your rental income. However, if the LLC will pay taxes at 15% and this income is not subject to double taxation, then your rental income now will be subject to only 15% taxes instead of the previously higher rate of 33%. This assumes, of course, that you personally do not need to pay any taxes on this rental income at the time you take distributions from your LLC.

Estate Taxes

If estate taxes are repealed, that could be good for those investors with higher net worth. If you are hanging onto real estate and other assets to pass onto your kids, you may now be able to escape the 40% tax that comes along with transferring these assets. One of the pitfalls, however, is the proposal to potentially take away the step-up tax basis. Many people use 1031 exchanges to defer taxes on capital gains. With step-up tax basis, you can potentially pass it on to heirs at stepped up basis so that the heirs can sell it the very next day and pay zero cap gains taxes. If the step-up basis is taken away, we may need to do some additional planning on those with highly appreciated real estate. Heirs may want to hang onto some of those properties instead of selling them in that case to avoid taxation personally.

You may already know that one of the best ways to protect ourselves from taxes is with proactive tax planning. Over the next year, we should all stay on top of the new tax changes as they take shape, so that we can take advantage of the good ones and avoid any costly mistakes.

What do you think about proposed tax changes? How do you think your investing business will be impacted?

Let me know with a comment!

About Author

Amanda Han

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.


  1. David Krulac

    And don’t forget the “Retirement Improvement and Savings Enhancement Act” aka the RISE Act written by Senator Ron Wyden of Oregon which has several big changes to Self directed IRA, Roth IRAs, RMDs and other changes, which could have a drastic effect of real estate investors using self directed IRSs.

  2. Katie Rogers

    I think we should stop normalizing the existential crisis America is facing right now. We have far bigger problems than how this election may affect our bottom lines. A lot of our friends on this forum may be facing serious risks.

    You may say this is not the place, but every place is appropriate when we see the clear threats already evident. I could cite news reports, but I am sure you have already seen those. Some of our friends may have new personal experiences not reported in the news.

    Going on about our business as if nothing is happening strikes me as odd.

  3. Jody Sims

    I find myself thinking more about the jobs Grump says he can create by lowering the corporate tax rate on the one hand, but by closing tax loopholes on the other. [Truman said he would like a one-handed economist because they’d tell him “one one hand” and “on the other hand”. lol]
    Anyhow… my thinking is corporations are going to find themselves paying quite a bit more in taxes. This will lead to fewer jobs, not more. Fewer jobs means fewer buyers and a really tough market for REI-ers. I am anticipating a slower economy due to the changes he’s proposed. Perhaps Congress will check him on these ambitions and make him see the light, but I am not counting on it. We could have serious unintended consequences from electing a total novice to president. Fortunately, a presidential term is only 4 years. =)

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