THE Thread on the Final GOP Tax Bill

Brandon Hall · 2017-12-20T11:20:45-08:00

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 residence2. Depreciation schedules. (Except for commercial properties on ADS). Ask away!

Fausto CarosellaPro Member

Real Estate Broker · Boca Raton, FL · Member since 2014 · 98 posts · 23 votes

8y

So let me see if I can get this straight: Being a Real Estate Broker/Agent operating as an S Corp I would NOT be able to take that 20% deduction because I am one of the"Service Industries", therefore I would be taxed at my individual tax rate?... UNLESS my income is LESS than $157,500 at which point I could take the 20% deduction....? It appears as though it would be more beneficial to become a C-corp if income will be more than $157,500 the tax rate would be 21% no matter what level the income? Also I know personal deductions have been eliminated, but what about deductions for business expenses like mileage or meals when we take out a client for example? Thanks....

0 Reply

Todd Willhoite

Attorney · Claremore, OK · Member since 2013 · 125 posts · 61 votes

8y

@Ben Raygor Thank you for clarifying.

0 Reply

Scott JensenPro Member

Financial Advisor · Blaine, MN · Member since 2014 · 478 posts · 387 votes

8y

Originally posted by @Linda Weygant:

Thanks for putting this out, @Brandon Hall. You're amazing, as usual.

Just to be clear - the individual mandate penalty doesn't go away until 2019. It's still in affect for 2018, so folks shouldn't go dumping their health coverage just yet. Based on a story I heard on NPR, the reasoning for kicking this particular can down the road, so to speak, is to give congress time to figure out just what the heck they are going to do with health care. For now, the individual mandate penalty is a strong tool for keeping the system afloat (rightly or wrongly - I'm not going to debate that issue right now).

I am also incredibly pleased to see that the 121 Exclusion (Capital Gains on the Sale of a Personal Residence) has not changed and remains at 2 of 5 years instead of what would have been a horrible 5 of 8.

The amount of "other stuff" included in the bill is going to take a while to digest and commit to memory. This is stuff that's not specific to real estate investors such as:

No alimony deduction for payers. No alimony income for recipients.

No more moving/relocation deduction

Medical Expense threshhold goes back down to 7.5% (from 10%). But likely moot for most people given the standard deduction increase/loss of SALT deduction. You now have to be REALLY REALLY sick to get medical deductions instead of just REALLY sick.

2% Misc Deductions are gone. No more write offs of gambling losses, employee expenses, tax prep fees, investment fees, etc.

529 State Education Accounts can now be used for primary and secondary schools in addition to higher education and can now also be used for religious and other private schools

You can no longer unwind a Roth Contribution

So many other nit-picky changes that will apply to very few folks, but will be important to get right for those to whom it does apply.

Just a clarification: Recharacterizations of Roth conversions are now prohibited. However, you are still allowed to recharacterize a Roth contribution. (Especially in the case you contributed too much or are over the income limits.)

0 Reply

Megan Hirlehey

Pittsburgh, PA · Member since 2016 · 140 posts · 119 votes

8y

Didn't see this already covered in the questions, just wondering if I'm interpreting it wrong (from the NAR website

https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals?tp=i-H43-Bb-1Jq-1coIY-1p-EY1H-1c-1Z75h-1aGKyN&om_rid=24026150%20&Om_ntype=NARstandard&om_mid=5074 ):

Exclusion of Gain on Sale of a Principal Residence

The final bill retains current law. A significant victory in the final bill that NAR achieved.
The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.

It's my understanding that the current law states that single filers who netted over $250k and joint filers who netted over $500k had to pay capital gains on the sale of their house (over that amount?), and this says the current law remains in effect, but it also says that the House bill WOULD have phased out this exclusion for taxpayers whose INCOMES were over the stated levels.. I realize that that did not happen, but I want to verify that my understanding of the current (and continuing) law is correct - Is the exclusion based on the netted gain from the sale of the house or is it based on the INCOME of the sellers? That difference could be substantial for people who don't earn over those limits, but lived in a house long enough that it appreciated over said limits..

1 Reply

Brandon Hall

OP

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

8y

@Todd Willhoite Sec 179 will be expanded to include roofs, heating, HVAC, and fire for non-residential property. This means commercial property. But this could also mean short-term rentals if you structure them correctly.

@Natalie Hideg you do not need to put anything into LLCs or Corps. Sole props (Sch C or E) are included in the bill for the pass-through deduction.

@Account Closed if you actively participate in your rental activities, you will qualify for the deduction. If you are a partner in a business that is an active trade or business, even if you are passive, you will also qualify. Per my understanding of the new rules.

2 Reply

Brandon Hall

OP

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

8y

@Megan Hirlehey the Section 121 exclusion allows you to claim a $250k ($500k if married filing joint) "deduction" from the gain realized on the sale of your primary residence as long as you have lived in it for the past 2 of 5 years. The gain = sales price - basis.

1 Reply

Angel S.

Investor · Madison, WI · Member since 2015 · 14 posts · 1 vote

8y

@Brandon Hall Thanks for all this information! How does the bonus depreciation work? I had a gravel driveway replaced with concrete November 2017 and would like to know if that's included. Are there any other rules on this depreciation other than useful life of less than 20 years?

0 Reply

Account Closed

Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes

8y

Originally posted by @Dave Foster:

@Brandon Hall, That too is my understanding - 1031 remains for real property and is eliminated for personal property. The impacts of this on dost segregation will be interesting. Much study needed to determine the right course when there is the opportunity for instant expensing vs inclusion in the 1250 portion. I'm not bright enough to see the end game yet. The actual details will flesh out with statute details and commentary.

I'm also thinking about this with older 1031's and the 2.5% limitation who might get caught with not enough basis to take the full new pass through deduction.

0 Reply

John Woodrich

Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes

8y

@John Woodrich if you actively participate in your rental activities, you will qualify for the deduction. If you are a partner in a business that is an active trade or business, even if you are passive, you will also qualify. Per my understanding of the new rules.

I read it the same way as you so far - I expect regulations to further clarify for us shortly. These provisions are good however I don't think the new business income deduction will have a large impact on BP RE investors because of the wage/basis/income limitations I mentioned prior. Large real estate companies may do pretty well.

1 Reply

Brandon Hall

OP

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

8y

I want to take a minute and show an example related to the new pass-through deductions.

Sole proprietors, LLCs, and S-Corps that are not service business (unless they are below the wage thresholds...explained later) now qualify for a deduction on "combined qualified business income." The deduction is equal to the sum of:

The lesser of:
- Combined Qualified Business Income, or
- 20% of the excess of: the taxable income divided by the sum of any net capital gain.
The lesser of:
- 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer, or
- taxable income reduced by the net capital gain.

--

Combined Qualified Business Income Amount (in general) is the lesser of:
- 20% of the qualified business income with respect to the qualified trade or business, or
- The greater of:

--

As an example, let's assume we don't have capital gain or qualified cooperative dividends. Let's also assume that we have a $1MM property that produces $100k in net income. The property is held in an LLC and does not pay W-2 wages.

Because we don't have capital gain or dividend income, all we need to do is determine "combined qualified business income."

In this example the deduction will be the lesser of:

(1) 20% of the net income ($20,000) or
(2) the greater of:
(2a) 50% of wages paid ($0); and
(2b) 25% of wages paid ($0) PLUS 2.5% of the basis of the property ($25,000).

Because $20,000 is less than $25,000, you would take a $20,000 deduction on your tax returns.

Note that if an individual's taxable income (that means ALL income) is less than $157,500 ($315,000 if MFJ), you do not have to go through this calculation. Instead you just take a 20% deduction on qualified business income. Additionally, all service businesses (realtors, lawyers, property managers, accountants, etc) will be able to take the deduction if the individual's taxable income is below these thresholds. Once taxable income goes above these thresholds, service businesses are phased out of the deduction.

Last thing - the deduction is calculated on a business-by-business basis. That means that you can have five businesses and each business will need to run through these calculations to determine the deduction. Additionally, you can be a PARTNER in businesses and (we're assuming) the business would need to tell you what your allocable share of the deduction is.

8 Reply

John Woodrich

Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes

8y

Originally posted by @Dave Foster:

@Brandon Hall, That too is my understanding - 1031 remains for real property and is eliminated for personal property. The impacts of this on dost segregation will be interesting. Much study needed to determine the right course when there is the opportunity for instant expensing vs inclusion in the 1250 portion. I'm not bright enough to see the end game yet. The actual details will flesh out with statute details and commentary.

Many CPAs were already a little concerned about this in the past but now it is more clear. If the exit strategy is to exchange the property via a 1031 exchange a cost segregation may not be the best idea. I wouldn't expect a company selling cost seg services to mention this. In the past, if you exchanged a building for another building we always had to consider what the tax implication are for the assets broken out as personal property? It is clear now that you can't exchange your new washer and dryer set for a constructed wall in your new building.

0 Reply

Amy Webber

Investor · Simpsonville, SC · Member since 2016 · 135 posts · 73 votes

8y

Regarding item # 8. in the initial post - "529 plan funds can now be used to pay for public, private, and religious elementary and secondary education."

We had withdrawn our 529 funds earlier this year with the thought that buying rental properties to generate the income needed for monthly tuition was preferable to letting the funds sit in the limited investment options in the 529. This has gone as planned and the returns are good.

We are about to complete a refinance of a property and could potentially return these funds to the 529 before the end of the year. We are in SC where there is a state tax savings from putting funds into a 529.

1) Would it be beneficial to return the funds (if undoing a 529 withdrawal is possible) and then make monthly withdrawals matching the tuition amount starting in Jan 2018?

2) Leave as is but deposit our tuition funds into a 529 and then pay the tuition from there during 2018?

3) Do we know how to process funds from a 529 to pay for these elementary and secondary education expenses?

A big Thank you to @Brandon Hall for starting this thread and all the responses as well as and all the other CPA's who are helping with all these questions!

Amy

0 Reply

Austin M.

Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes

8y

Is the $315,000 limitation your AGI? It seemed like if you have a W2 also then that wouldn't be calculated in it. If you are above $315,000 then do we know what the phaseouts are? In your example is 1M property the original cost basis minus land value that was used for depreciation? Does this have to be recaptured at the sale?

Originally posted by @Brandon Hall:

I want to take a minute and show an example related to the new pass-through deductions.

Sole proprietors, LLCs, and S-Corps that are not service business (unless they are below the wage thresholds...explained later) now qualify for a deduction on "combined qualified business income." The deduction is equal to the sum of:

The lesser of:
- Combined Qualified Business Income, or
- 20% of the excess of: the taxable income divided by the sum of any net capital gain.
The lesser of:
- 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer, or
- taxable income reduced by the net capital gain.

Combined Qualified Business Income Amount (in general) is the lesser of:
- 20% of the qualified business income with respect to the qualified trade or business, or
- The greater of:
  - 50% of the W-2 wages with respect to the qualified trade or business, or
  - The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

--

As an example, let's assume we don't have capital gain or qualified cooperative dividends. Let's also assume that we have a $1MM property that produces $100k in net income. The property is held in an LLC and does not pay W-2 wages.

Because we don't have capital gain or dividend income, all we need to do is determine "combined qualified business income."

In this example the deduction will be the lesser of:

(1) 20% of the net income ($20,000) or
(2) the greater of:
(2a) 50% of wages paid ($0); and
(2b) 25% of wages paid ($0) PLUS 2.5% of the basis of the property ($25,000).

Because $20,000 is less than $25,000, you would take a $20,000 deduction on your tax returns.

Note that if an individual's taxable income (that means ALL income) is less than $157,500 ($315,000 if MFJ), you do not have to go through this calculation. Instead you just take a 20% deduction on qualified business income. Additionally, all service businesses (realtors, lawyers, property managers, accountants, etc) will be able to take the deduction if the individual's taxable income is below these thresholds. Once taxable income goes above these thresholds, service businesses are phased out of the deduction.

Last thing - the deduction is calculated on a business-by-business basis. That means that you can have five businesses and each business will need to run through these calculations to determine the deduction. Additionally, you can be a PARTNER in businesses and (we're assuming) the business would need to tell you what your allocable share of the deduction is.

0 Reply

Brandon Hall

OP

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

8y

So my team and I have literally been sitting around all day to dream up new strategies for our clients (who are all real estate investors).

Here's one that we've come up with.

For new acquisitions, if the rental will likely generate passive losses, allocate more basis to land and take less depreciation.

The new pass-through deduction is a freebie. But the deduction is only available if you have net taxable income after all expenses, including depreciation and amortization.

So when you buy the next property, allocate more basis to land. This will reduce your depreciation expense. But if you have a smart tax advisor, you can likely net out the lost depreciation expense with this new freebie deduction.

The tax benefit is realized on the sell-side. When you liquidate a rental, you pay depreciation recapture taxes on the depreciation you've taken over the life of the rental.

So if you report less depreciation over the hold period, you pay less recapture taxes in the end. But best of all, it didn't hurt you during the hold period because you utilized this new freebie deduction each year to bring your taxable income down to $0.

Note: this is not a relevant strategy if you purchase property that is likely to produce high amounts of net income after depreciation every year (NNN, Commerical, Large Apartments, Short-Term Rentals).

Second Note: more planning will be required for folks that want to utilize cost segregation. You don't want to crush it on the cost seg side and not be able to utilize this freebie deduction because you no longer have net income to report.

7 Reply

Jack B.

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

8y

Bonus depreciation must be pro-rated for the year if I move back into a rental or no?

Let's say I replace the roof on a rental in January 2018, then move back into the house in February or March 2018. Must I pro-rate the bonus depreciation on the roof (7K to replace)?

0 Reply

Brandon Hall

OP

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

8y

@Amy Webber personally, I hate 529 plans. I wrote a BP article a while back on how to better structure your tax position by paying your kids and moving money into a Roth IRA, instead of contributing to a 529, and I got thrashed by financial advisors.

Admittedly, I now hate 529s a lot less. Opening them up to pay for qualified educational expenses for the child's entire schools career (essentially) makes 529s a much better vehicle. When you invest in a 529, you can let your capital grow which will allow you to pay for these expenses tax free.

Should you do it? I don't know - talk to your CPA/financial advisor.

@Austin M. the $315k limit is taxable income. Taxable income is on Line 43 on the current Form 1040.

2 Reply

Austin M.

Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes

8y

Do we think that this deduction will be on a PER property basis or a summation and calculation of every property on the schedule E. If it is a summation it might make sense to purchase high valued properties at high land value to increase the cost basis.

Originally posted by @Brandon Hall:

I want to take a minute and show an example related to the new pass-through deductions.

Sole proprietors, LLCs, and S-Corps that are not service business (unless they are below the wage thresholds...explained later) now qualify for a deduction on "combined qualified business income." The deduction is equal to the sum of:

The lesser of:
- Combined Qualified Business Income, or
- 20% of the excess of: the taxable income divided by the sum of any net capital gain.
The lesser of:
- 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer, or
- taxable income reduced by the net capital gain.

Combined Qualified Business Income Amount (in general) is the lesser of:
- 20% of the qualified business income with respect to the qualified trade or business, or
- The greater of:
  - 50% of the W-2 wages with respect to the qualified trade or business, or
  - The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

--

As an example, let's assume we don't have capital gain or qualified cooperative dividends. Let's also assume that we have a $1MM property that produces $100k in net income. The property is held in an LLC and does not pay W-2 wages.

Because we don't have capital gain or dividend income, all we need to do is determine "combined qualified business income."

In this example the deduction will be the lesser of:

(1) 20% of the net income ($20,000) or
(2) the greater of:
(2a) 50% of wages paid ($0); and
(2b) 25% of wages paid ($0) PLUS 2.5% of the basis of the property ($25,000).

Because $20,000 is less than $25,000, you would take a $20,000 deduction on your tax returns.

Note that if an individual's taxable income (that means ALL income) is less than $157,500 ($315,000 if MFJ), you do not have to go through this calculation. Instead you just take a 20% deduction on qualified business income. Additionally, all service businesses (realtors, lawyers, property managers, accountants, etc) will be able to take the deduction if the individual's taxable income is below these thresholds. Once taxable income goes above these thresholds, service businesses are phased out of the deduction.

Last thing - the deduction is calculated on a business-by-business basis. That means that you can have five businesses and each business will need to run through these calculations to determine the deduction. Additionally, you can be a PARTNER in businesses and (we're assuming) the business would need to tell you what your allocable share of the deduction is.

0 Reply

Megan Hirlehey

Pittsburgh, PA · Member since 2016 · 140 posts · 119 votes

8y

@Brandon Hall Ok thanks, that’s what I thought. The fact that the income cut-offs stated in the proposed house bill were exactly the same as the current gains exclusion threw me off

0 Reply

Kiley N.

Honolulu, HI · Member since 2017 · 231 posts · 191 votes

8y

@William Glass , my understanding is that any equipment acquired and placed into service from 9/30/17 (4Q17) qualifies retroactively. I didn't realize roofs, etc. were also to be included going forward. Thanks @Brandon Hall !

0 Reply

Kiley N.

Honolulu, HI · Member since 2017 · 231 posts · 191 votes

8y

Originally posted by @Brandon Hall:

So my team and I have literally been sitting around all day to dream up new strategies for our clients (who are all real estate investors).

Here's one that we've come up with.

For new acquisitions, if the rental will likely generate passive losses, allocate more basis to land and take less depreciation.

The new pass-through deduction is a freebie. But the deduction is only available if you have net taxable income after all expenses, including depreciation and amortization.

So when you buy the next property, allocate more basis to land. This will reduce your depreciation expense. But if you have a smart tax advisor, you can likely net out the lost depreciation expense with this new freebie deduction.

The tax benefit is realized on the sell-side. When you liquidate a rental, you pay depreciation recapture taxes on the depreciation you've taken over the life of the rental.

So if you report less depreciation over the hold period, you pay less recapture taxes in the end. But best of all, it didn't hurt you during the hold period because you utilized this new freebie deduction each year to bring your taxable income down to $0.

Note: this is not a relevant strategy if you purchase property that is likely to produce high amounts of net income after depreciation every year (NNN, Commerical, Large Apartments, Short-Term Rentals).

Second Note: more planning will be required for folks that want to utilize cost segregation. You don't want to crush it on the cost seg side and not be able to utilize this freebie deduction because you no longer have net income to report.

Brilliant. Savings on the front and back end!

1 Reply

Jack B.

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

8y

There's a 2.5% deduction on the basis of the real estate/rentals I own in this bill? I can deduct 2.5% of the value every year?? Wow, that's nice. But does it help reduce my taxable income from my job at all? I'm not a real estate pro, I am an IT pro.

0 Reply

Yonah WeissPro Member

Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes

8y

Originally posted by @John Woodrich:

I don't see why this is so clear at all. The new bill mentions 1031 can only be applied to real property (1250), as opposed to personal property (1245). I assumed that is coming to exclude like-kind exchanges of planes, cars, equipment and the like, which was common practice to off-set capital gains. Not the 1245 property within real property.

My understanding, and correct me if I'm wrong was that is:

In general, the definition of real property under section 1031 is determined by state law. In contrast, the definition of real and personal property (1250/1245) for tax-depreciation purposes is determined under federal law. State law tends to classify fixtures in a building as real property. Therefore, property such as wall coverings, carpeting, special purpose wiring or other installations affixed to the building can be considered real property under state law and like kind for section 1031 purposes, but personal property in cost segregation studies. Thus, real estate owners can benefit from both the gain deferral under section 1031 for real estate exchanges and the enhanced cost recovery deductions of the cost segregation study.

@Dave Foster you posted about this a few days ago as well. Has anyone heard anything concrete that the definition has changed, or are we just speculating?

2 Reply

Austin M.

Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes

8y

The 2.5% appears to be for the unadjusted basis used for deprecation (not land)

I'm sure you cant use it to reduce your taxable income at your IT job. Its only for profits on real estate.

Originally posted by @Jack B.:

There's a 2.5% deduction on the basis of the real estate/rentals I own in this bill? I can deduct 2.5% of the value every year?? Wow, that's nice. But does it help reduce my taxable income from my job at all? I'm not a real estate pro, I am an IT pro.

0 Reply

Ron Hall

Investor · Joplin, MO · Member since 2015 · 76 posts · 78 votes

8y

5. C-Corp tax rate reduced to 21%.

What about LLC's and S-Corp?

0 Reply

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8y

@Yonah Weiss, yep I posted that in another forum. And that's still one of the big big question marks. The different treatment based on state vs fed interpretation already made for much squeamishness. Now with further separation within the fed statutes it's anybody's guess how this type of thing will be treated.

The 1031 Investor5140 Reviews

Website View Page

3 Reply

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

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

Most Popular Reply

272 Replies

Exclusion of Gain on Sale of a Principal Residence