How does new tax plan affect REI?

20 Replies

So the new tax plan was finally unveiled and I noticed it curtails deductions for business interest, but there are "special rules" for real estate and small business.   Can anyone confirm....are we still going to be able to deduct interest on a mortgage for investment property, as a business expense?  

I don't know, but I'm glad you started this thread. 

I think the thread is somewhat premature but a great idea. 

this article was extremely positive for REI'ers....i hope he's correct in details of new plan:

http://fortune.com/2017/10/02/trump-gop-tax-plan-mortgage-interest-deduction/ 

Instant love for any CPAs who do a rundown once plan details are released.  RE comment bove, not premature at all...If you have a mortgage or pay property tax on rental RE, this has the potential to affect you... Thus, the value of the VAST MAJORITY of our RE will INSTANTLY be affected by the details of this plan.

I agree right now we are speculating. However I did just read in USA Today this morning that they are proposing a $500k cap on the mortgage interest deduction. That would be brutal burden in any major city.

None of this is law yet. $2500 limits on 401k contributions, loss of interest deduction on home mortgages, increased personal standard deduction, corporate tax 25% max, 3 tax brackets, capital gains tax, Etc. all these will affect how people run their businesss and investments. There are billions of dollars of lobbyists and dysfunctional D.C. adjusting the bill. I think it is to early to make business decisions today. Good to see what's out there and what will affect you but I generally can adapt faster than D.C. can implement. 

For the plan just announced there is not an additional limit on 401(k) contributions.

Of note are the business provisions. There is mention of a provision of a 25 % rate for small businesses and a higher then individual tax rate formula for wages paid to yourself by passive small businesses. I would be interested in how that plays out. The AMT being gone will be good. The cap on dedictibility of state and local taxes is a killer for high cost states. I think it will impact the real estate market but it hard to say exactly how and it wont be immediate.
Originally posted by @Colleen F. :
Of note are the business provisions. There is mention of a provision of a 25 % rate for small businesses and a higher then individual tax rate formula for wages paid to yourself by passive small businesses. I would be interested in how that plays out. The AMT being gone will be good. The cap on dedictibility of state and local taxes is a killer for high cost states. I think it will impact the real estate market but it hard to say exactly how and it wont be immediate.

I agree I think it impacts the market but I think the current state of the proposed regulations only improves the landscape for real estate investors. It takes benefits away from owning your own home with the cap also affecting real estate taxes. And capping the interest deduction on mortgage interest will also affect home ownership rates where prices are high.

@Colleen F. if you own real estate and rent it out you can still deduct the property taxes as a business expense from your income generated....and that is regardless of whether you live in NY or Kansas, doesn't matter.  i don't see anywhere that writing that off as business expense is being touched.  If you're a home owner in high tax state, then yes....you're going to get hurt by it.  but doesn't affect your investments. i don't think anyway. 

Probably the change closest to the hearts of folks here... limits on the tax free gains of your personal residence is being introduced.

Currently you can sell your home, and pocket the gains (up to $250k/500k) every 2 years. This would change it to every 5 years. 

A couple points from a first read of the details though it is far too early to tell:

1) Extending the time period requirement for tax free gains on personal residence will hurt,

2) There is some discussion of making edits to like-kind exchanges though it is not clear how that will work,

3) The $500k mortgage deduction piece and property tax caps are individual tax provisions.  You should still be able to deduct interest and property taxes as a business expense on rental properties.

4) There are provisions allowing for accelerated depreciation and limitations on interest expense for businesses though it is not clear how those will be treated within the real estate space.

Generally speaking, most of what you see as generic news coverage is going to discuss the impact on individual tax returns.  What we all care about is the impact on business-side activity and that is going to require a lot of time in the details to really discern.  This is also definitely going to change once a CBO score is put together and the Senate get's its hands on it.  

Another point, these changes are generally set to take place beginning in 2018.  That being said, there will probably be clever tax planning moves that can be made prior to the end of 2017 once more information is available.  Stay tuned and you can probably save a few bucks in taxes.

@Chris Clark I think the personal residence issues and grandfathering of the deduction for mortgage interest above 500,000 will result in people sitting on homes longer rather then selling them in high cost states, however if they can't write off the local taxes it might be a wash.  Elsewhere it may not matter.  The change to 8 years for personal residence may also have people stay in homes longer. This will be offset by renters who want to rent single families because they are in areas for a short time.

@Account Closed I don't see that detail spelled out,  I do think they will get into business deductions at some point and we will see how that pans out.

Not looking good for investors or regular homeowners.

http://realtormag.realtor.org/daily-news/2017/11/02/tax-reform-bill-would-cap-mid-for-new-mortgages?tp=i-H43-Bb-109-16pXl-1p-GCpr-1c-16lwf-nerPN&om_rid=16404441%20&Om_ntype=RMOdaily&om_mid=3853

I agree this is extremely premature.  Here are a few steps before this will become law.

1)  "Chairman's markup" where the chair of the committee will change anything he wants to change.

2)  "Committee's markup" where the committee changes anything a majority wants to change.

3)  "Committee vote" to get it out of committee.

4) Rules Committee will write a rule about it.  It will spell out floor debate and amendment limits.

5) Floor debate and amendments.

6) Full House vote.

Then the bill will be really started.  Before that it is just talk.  It could be killed at anyone of the above mentioned steps.  It could also be changed where it looks nothing like the current bill.  It could be voted on in a manner where the plan is to send it to the Senate for them to write.

Originally posted by @Jared Viernes :

Not looking good for investors or regular homeowners.

http://realtormag.realtor.org/daily-news/2017/11/0...

I can see the impact to home ownership for personal residences. Nothing in the article refers to investors losing anything. The exclusion for sale of your home may have more restrictions but it doesn't say it's going away. Business expenses will still be deductible and everything I've seen hasn't touched mortgage interest on rentals just on the personal residence.

One thing that most aren't talking about is that for most of the U.S. this doesn't really change too much. Yes there will be some states hit with it harder than others but even the mortgage interest item is just for new residences.

A frequent CPA contributor on BP's thoughts on it below.  I guess I always thought deducting taxes was allowed because it was a business expense not because you could deduct them at Fed level.  

If he's right this sucks and f u trump. 

See our complete thoughts on the H.R.1 bill by clicking this link (and feel free to share it!).


Two big wins are:
1. Elimination of the Alternative Minimum Tax.
2. Reduction in in tax rates for C-Corps to a maximum 20% and most S-Corps and LLCs to a maximum 25% tax rate.

Two big losses are:
1. Loss of itemized deductions (state & local income taxes and a $10,000 limit on real property taxes).
2. The Section 121 Exclusion which allows you to exclude capital gains on the sale of your primary residence has been modified to make it harder to claim.

What about the elimination of the exclusion of rental income being subject to self employment taxes? Thoughts?

“Rental Income may now be subject to self-employment taxes (pg. 51)
Proposed amendment removes the exclusion of rental income from the definition of “net earnings from self-employment tax”

Any update on the section 121 exclusion? I’ve read somewhere that if you have a fully executed contract before 2018, you are excluded from the capital gains tax reform? I lived in my primary residence in two of the last 4 years, before it was converted into a rental. My tenant moved out yesterday and I was planning to list it for sale this month.

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