THE Thread on the Final GOP Tax Bill - Q&A

THE Thread on the Final GOP Tax Bill - Q&A

CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes

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. 

Link to the bill.

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). 

Ask away!

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Most Popular Reply

Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
8y

I am so glad for BP and people smarter than me!

See this reply in the discussion

272 Replies

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  • Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Rick Pinney:

    Brandon Hall will previous rentals be grandfathered in to deduct mortgage interest? If it is will it be lost if you refinance, say from FHA to conventional?

    As already noted, you can still deduct rental mortgage interest and all other expenses....It's not "grandfathered" in. They just didn't change that portion of the law.

  • Real Estate Investor · Charlotte, NC · Member since 2014 · 28 posts · 21 votes
    8y

    I logged in hoping to hear words of wisdom from Brandon Hall, and he did not disappoint. Thank you for the summary!

  • Nicholas AiolaBusiness Member
    CPA & Investor · New York, NY · Member since 2017 · 1k+ posts · 1k+ votes
    8y
    Brandon Hall Great summary and info. I'll definitely be tracking this to read all the back and forth and help chime in whenever I can!
    Aiola CPA, PLLC554 Reviews
  • Bloomington , MN · Member since 2017 · 5 posts · 0 votes
    8y
    I really appreciate the start of this conversation and I will be watching this thread. I sent an email of questions to my financial advisor but with the new bill, I'm sure not everyone completely understands how it affects certain people. I understand the changes for the standard deductions but how does it affect (positively or negatively) us who take itemized deductions for our personal taxes and for our rental properties? Would it make more sense to LLC or Corp my "rental business" and keep my eligibility to take advantage of the large standard deduction (married filing jointly)? Anyone have insight to this?!
  • Ben RaygorPro Member
    CPA · Rochester, MN · Member since 2016 · 48 posts · 51 votes
    8y
    Originally posted by @Account Closed:

    If I own a few rental houses + apartments under my personal name and currently report tax on Schedule E, do I qualify for the 20% passthru deduction? Or do I need to put my rentals under a Single Member LLC?

    The deduction has nothing to do with an LLC. Net rental income (or flip/wholesale/etc income) after all deductions will (most likely) have a 20% deduction on the net income or a 2.5% deduction on the asset basis. A SMLLC still does not result in a different tax treatment for your rental properties or active business. It's a legal entity. Creating an LLC positions yourself to potentially elect to treat your LLC as an S-Corp, (which many investors do for tax savings purposes when they have active income running though that LLC), but until that LLC is S-Corp or C-Corp, it still will result in the same income and expenses being reported on Sch E and/or Sch C of your personal tax return.

  • Los Angeles, CA · Member since 2017 · 6 posts · 8 votes
    8y
    Originally posted by @Ben Raygor:
    Originally posted by @Account Closed:

    If I own a few rental houses + apartments under my personal name and currently report tax on Schedule E, do I qualify for the 20% passthru deduction? Or do I need to put my rentals under a Single Member LLC?

    The deduction has nothing to do with an LLC. Net rental income (or flip/wholesale/etc income) after all deductions will (most likely) have a 20% deduction on the net income or a 2.5% deduction on the asset basis. A SMLLC still does not result in a different tax treatment for your rental properties or active business. It's a legal entity. Creating an LLC positions yourself to potentially elect to treat your LLC as an S-Corp, (which many investors do for tax savings purposes when they have active income running though that LLC), but until that LLC is S-Corp or C-Corp, it still will result in the same income and expenses being reported on Sch E and/or Sch C of your personal tax return.

    Thanks, can someone explain what the whole 2.5% of basis is all about? It seems confusing AF

  • Bloomington , MN · Member since 2017 · 5 posts · 0 votes
    8y
    If I itemized for my personal deductions on my 1040 and schedule E for my rentals, can I switch to take the $24k standard deduction on the 1040 while still itemizing on the schedule E under this new plan?
  • Investor · New York City Fort Myers FL, Birmingham AL · Member since 2016 · 105 posts · 52 votes
    8y

    Confirming the tax bill takes effect for 2018 tax year and not retroactively for 2017, Correct? I have seen all the details of the key changes but not confirmation on this point. I need to make educated decisions the next week and a half for 2017 taxes. 

  • Ben RaygorPro Member
    CPA · Rochester, MN · Member since 2016 · 48 posts · 51 votes
    8y

    @Natalie Hideg Let's make sure you understand "itemized deductions" clearly first vs your expenses for a rental property. You don't "itemize deductions" for a rental property in the way the phrase is used for your personal tax return. If you have a rental property, you always report the rental income, insurance, repairs, maintenance, property taxes, mortgage interest, etc. that is directly related to that rental property. This will all show up on Schedule E for each rental property you own, whether you use an LLC or not (unless those properties are owned by a partnership, S-Corp, or C-Corp).

    When taxpayers "itemize deductions" on their personal return, we are referring to the Schedule A in which they are able to report the mortgage interest from their primary home (which is not being rented out...unless you're house hacking, in which case the personal use portion of the mortgage interest and property taxes are reported on Schedule A), and the property taxes from their primary home.  This is the real estate part of Schedule A.  

    There is another line on Schedule A for State and Local Income Taxes paid.  For many higher income earners, this line has been a large portion of the total amount that ends up exceeding the standard deduction for the taxpayer, thus allowing them to claim "itemized deductions" on their tax return instead of the standard deduction.  

    The proposed tax change is to only allow an aggregate $10,000 amount from the combined categories of 1) state and local income taxes, 2) property and personal taxes, and 3) personal mortgage interest paid.  This, along with the increased standard deduction will result in MANY more taxpayers claiming the standard deduction on their tax return in the future, even though they itemized deductions in the past.  This change will have no effect on your rental property investments.  

  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    8y

    This bill passed on my birthday! Great present! I believe it will help small businesses greatly. Certain people point to large corporations potentially trying to horde money with savings but small businesses not these large corps employ the majority of the people nationally.

    I think the health mandate also from Obamacare was repealed. That might put a lot of more jingle in people's pockets being able to choose the health plan they want. A very large percentage of discretionary income for many people was going to these bloated health care plans.  

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Jack B.:

    -Does this mean getting my real estate license (I work full time as an IT pro) so I can buy and sell properties more easily and make some money off my purchases (transaction fee) will be a bad idea now, since I would likely pay more tax (the way I understand it) being a real estate pro?

    -With or without being a real estate pro, let’s say I replace a roof on a rental January 2018, then move back into the rental in February 2018, or March, etc. Would I still be able to deduct the cost of the roof 100% that year?

    If you work full time in IT you will never meet the real estate professional criteria

  • Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y
    All this talk about tax changes? Here are the changes... This tells you per your state exactly how it is affected: https://www.washingtonpost.com/graphics/2017/business/tax-bill-calculator/?utm_term=.8e56cd570968 This one is a little more technical: https://www.nytimes.com/interactive/2017/12/17/upshot/tax-calculator.html
  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Natalie Hideg:

    I really appreciate the start of this conversation and I will be watching this thread. I sent an email of questions to my financial advisor but with the new bill, I'm sure not everyone completely understands how it affects certain people. I understand the changes for the standard deductions but how does it affect (positively or negatively) us who take itemized deductions for our personal taxes and for our rental properties? Would it make more sense to LLC or Corp my "rental business" and keep my eligibility to take advantage of the large standard deduction (married filing jointly)? Anyone have insight to this?!

    Only your personal taxes should be claimed on Schedule-A, your rental property taxes should be claimed on Schedule-E.  It will make no difference how you are organized.  Talk to your CPA to decide if it makes sense to setup an entity, generally you would never want to keep real estate in an S-Corp.

    You can't pick and choose where to claim things, certain expenses have to be claimed on certain parts of your tax return.

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Natalie Hideg:

    If I itemized for my personal deductions on my 1040 and schedule E for my rentals, can I switch to take the $24k standard deduction on the 1040 while still itemizing on the schedule E under this new plan?

    You will either itemize your deduction OR you will take the standard deduction.  All rental expenses should be claimed separately on Schedule-E

  • Ben RaygorPro Member
    CPA · Rochester, MN · Member since 2016 · 48 posts · 51 votes
    8y
    Originally posted by @Todd Willhoite:

    Section 179 expenses seem to allow deduction of roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems on non-residential real property.  By "non-residential" do they mean just not on your primary residence, or only on commercial buildings to exclude rental houses?

    Todd, "non-residential" generally means that the property is not used to furnish lodging or in connection with the furnishing of lodging.  Commercial buildings that are providing office, warehouse, or storefront space, etc. would not be considered "lodging" in this case, so all personal property purchased and used in those commercial properties could potentially qualify for the Section 179 deduction.  "Non-residential" means that nobody is living in the property, whether it's your primary residence or a rental property that is the dwelling place of the tenant.  

    https://www.irs.gov/pub/irs-pdf/p946.pdf   - Page 18

  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    8y

    Suppose I buy a $1.5m home, borrowing $1.35m to do so.

    Three years from now, I convert it to a rental and start reporting it on Schedule E.

    Can I write off all of the mortgage interest, property taxes, and insurance?

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Brandon Hall:

    @Austin M. to determine the businesses that are excluded, we look at Sect 1202(e)(3)(A):

    (A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees,

    The new tax plan specifically allows engineering and architecture businesses to take the deduction. But based on the above code, it would appear that realtors and brokerages would not qualify for the deduction. 

    @Scott Jensen yes indeed!

    I have been too buried with tax planning to read all 1098 pages of the report that came out on Friday but if this is a passive investment under Section 469 this may not be considered a trade or business and qualify for the reduced rate.  I could be wrong but this is a bridge I plan to cross when I have to.  

    At the same time the reduction is subject to a wage or basis limitation so it is not an automatic reduction.  The benefits will largely depend on facts and circumstances.  For example, someone who has recently purchased a property will generally have a higher basis, more depreciation, and less business income.  The benefit may be little or $0.  Someone who has owned a property for a long time may have a low unadjusted basis (purchase price + improvements) so their reduction in rate may be small relative to the amount of income they have to claim... 

    In any instance this will help but it may not be as helpful as some are thinking.

  • Real Estate Agent · Sequim, WA · Member since 2017 · 64 posts · 39 votes
    8y

    @John Woodrich Why would putting a rental property/flipping business in an S corp be a bad idea? 

  • San Jose, CA · Member since 2017 · 20 posts · 13 votes
    8y

    @Brandon Hall - Thank you for this post. It's helpful for us new to REI!

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Clancy Catelli:

    @John Woodrich Why would putting a rental property/flipping business in an S corp be a bad idea? 

    Flipping business is fine.  Rental properties are generally a bad idea because if you complete a cash out refi to put money in your pocket it will likely be a taxable transaction. 

  • Ben RaygorPro Member
    CPA · Rochester, MN · Member since 2016 · 48 posts · 51 votes
    8y
    Originally posted by @Chris Mason:

    Suppose I buy a $1.5m home, borrowing $1.35m to do so.

    Three years from now, I convert it to a rental and start reporting it on Schedule E.

    Can I write off all of the mortgage interest, property taxes, and insurance?

    Chris, if you convert your $1.5M primary residence to a rental property used 100% for business in 2020, all of the mortgage interest, property taxes, and insurance will be 100% deductible against the rental income that property generates. If the conversion happens part way through the year, those expenses will need to be prorated. Having a loan on the property doesn't change the deductibility of any of those expenses - it just means you have to pay down debt and pay interest along the way for that property. 

  • Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    8y
    Originally posted by @Account Closed:
    Originally posted by @Ben Raygor:
    Originally posted by @Account Closed:

    If I own a few rental houses + apartments under my personal name and currently report tax on Schedule E, do I qualify for the 20% passthru deduction? Or do I need to put my rentals under a Single Member LLC?

    The deduction has nothing to do with an LLC. Net rental income (or flip/wholesale/etc income) after all deductions will (most likely) have a 20% deduction on the net income or a 2.5% deduction on the asset basis. A SMLLC still does not result in a different tax treatment for your rental properties or active business. It's a legal entity. Creating an LLC positions yourself to potentially elect to treat your LLC as an S-Corp, (which many investors do for tax savings purposes when they have active income running though that LLC), but until that LLC is S-Corp or C-Corp, it still will result in the same income and expenses being reported on Sch E and/or Sch C of your personal tax return.

    Thanks, can someone explain what the whole 2.5% of basis is all about? It seems confusing AF

     I think it's easier to explain with an example. Let's say you have a building with an original cost basis of $2M, you have a net taxable profit of $400,000 and you have no W-2 wages. Your 20% deduction would be $80,000, but it's limited to $50,000 (2.5% of $2M).

  • Chris ClarkPro Member
    Wichita, KS · Member since 2017 · 65 posts · 55 votes
    8y

    @Brandon Hall @Linda Weygant

    Thanks for your responses and insight.

  • Kyparissia, Messinia · Member since 2017 · 94 posts · 43 votes
    8y

    Regarding expats who wish to invest in the US: How would that affect our tax status? We already have property where we live and are paying taxes on. Would we still have to pay taxes on any income from rentals. Does that apply only for large investments, ie.. apartment buildings, or commercial, or would it also apply to smaller 2-4 MFR? Also, regarding LLC's. from what I've read it would only apply to companies with many employees and not small companies.

  • Real Estate Agent · Palm Beach Gardens, FL · Member since 2017 · 205 posts · 124 votes
    8y

    Here is a link from National Assoc of Realtors which I think explains the changes quite well.

    https://www.nar.realtor/tax-reform/the-tax-cuts-an...

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