Happy Holidays! As of today, the House and Senate have sent the GOP Tax Plan to the President to sign into law.
I've seen numerous threads popping up about the GOP Tax Bill. I wanted to start a thread to consolidate questions and basically provide a user guide (via the Q&A) for years to come.
I invite all tax pros on BP to contribute to this thread. It will be neat to see discussion on the tax bill itself, but also loopholes and strategies that develop once the massive bill has been digested.
Key highlights from the bill:
1. Mortgage interest deduction allowed on up to $750k of new acquisition debt starting Jan. 1, 2018. (Does not apply to rentals)
2. Interest paid on home equity loans that are not "acquisition debt" is not deductible. (Debt tracing rules will apply - if you use a HELOC to buy rentals, you can still deduct the interest).
3. State and Local Taxes (SALT) are limited to an aggregate $10,000.
4. A "freebie" deduction will be available beginning in 2018 for "combined qualified business income." Calculating the deduction can be complicated. Per our current understanding, you cannot use the deduction for activities generating passive losses. This includes sole props, meaning you do not need to utilize an entity (LLC/S-Corp) to qualify for the deduction as far as we can tell.
5. C-Corp tax rate reduced to 21%.
6. AMT still exists but the exclusion is higher.
7. Bonus depreciation is now 100% for assets with a useful life of less than 20 years.
8. 529 plan funds can now be used to pay for public, private, and religious elementary and secondary education.
9. Penalty from Obamacare individual mandate has been eliminated.
10. Rehabilitation tax credit reduced in scope.
11. Domestic Production Activity Credit (DPAD) eliminated.
12. Standard deduction increased, personal exemptions eliminated.
What did not change:
1. Section 121 Exclusion - aka Capital Gain Exclusion on primary residence
2. Depreciation schedules. (Except for commercial properties on ADS).
How much did the standard deductions increase? Is there a chart we can look at?
So Something on NPR just a few minutes ago, here in Cincy, said something about taxes and holding property for investment time required had changed? I'm just starting out here and this is my initial "slow flip" which I thought I had to hold for one year (per HUD) but do I now need to hold it for 2 to avoid higher taxes on the ROI?
@Hernell D. The standard deduction increased to 24k for married filing joint and 12k for single filers.
@Hernell D. $24k for MFJ -- $18k for HOH -- $12k for everyone else.
@Brandon Hall thank you! What do you think the biggest change for real estate investors will be?
@Taylorbrugna Thank you!
@Jen Siegrist they may have been referencing the Sec 121 exclusion, but there was no change there.
@Hernell D. Item #4 in my list - the "freebie" deduction. Basically, if you have net rental income (or flip/wholesale/etc income) after all deductions, including depreciation and amortization, you will (most likely) have a 20% deduction on the net income or a 2.5% deduction on the asset basis.
On #2 above states interest on Heloc for rental is deductible. What if the Heloc is on your primary residence and using proceeds to purchase rental house? If you have a Heloc with nothing borrowed on it in 2017 is there an incentive to draw on it now with the anticipation you will want to use the cash in a few months to purchase a rental?
I was just thinking about starting a thread like this. Glad someone legit stepped in to make it happen.
Does the ~20% pass-through entity deduction apply to sole props?
I think it overall is a fairly good bill. I do have some issues with the SALT change; however, many of the other items are great.
Fewer people are going to be subject to AMT due to the SALT change.
I see some significant upside for some C-corporations.
DPAD wasn't so much eliminated as I'd like to look at it as expanded to all businesses through the 20% deduction. Everyone comes out ahead in that one.
There are some changes to business interest deductions that I found interesting.
@Todd Willhoite It won't matter when you draw on the HELOC, what matters is what the funds are used for. If you are using the funds to buy rental properties, the interest will be "traced" to the rental property and it will always be deductible.
@Kiley N. yes the 20% deduction is available to sole prop income (Sch C and E).
@Mindy Jensen think we can/should sticky this for a week or two?
I am so glad for BP and people smarter than me!
@Yonah Weiss I believe 1031 Exchanges apply to Real Property only under the new legislation.
Michael Kitces has a good recap and analysis on his blog (aimed more toward financial planners). https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/
What I cannot seem to find is whether the other normal costs of rental properties are still deductible? (I was worried about taxes being lumped with the 10,000 cap but see they are not for rental properties.) Are Repair and Maintenance, replacing appliances, carpeting, etc. still itemizable or is the 20% deduction supposed to cover these write offs? Also couldn't find anything on depreciation.
So, am I correct that, if we already itemize and are over the standard deduction, we don't gain anything, just lose the personal exemptions. So our taxes may possibly increase.
The 20% pass-through deduction shouldn't prevent you from writing off normal business expenses such repairs and maintenance and depreciation.
The Texas Association of Realtors came out against the mortgage interest deduction and encouraged us to write to our representatives to oppose it. After reading the following example I can see why. If I understand the change correctly mortgage interest is not deductible on your 3rd homestead. Is that correct? and do you think that will adversely affect home sales?
Mortgage Interest Deduction
Individual tax provision
Deductible mortgage interest is capped at loans of $1 million.
It would limit deductible mortgage interest for newly purchased first or second homes to loans of $750,000 or less, starting in 2018.
@Brandon Hall so would a C-Corp be the best option for a Fix and Flip business? Or some other entity?
I was hoping to see some of my bigger pockets people discussing this as a newbie, the news reports had so much jargon I didn't really understand, but through this post I've gained a better understanding.