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

Tax, SDIRAs & Cost Segregation
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THE Thread on the Final GOP Tax Bill - Q&A

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

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

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

    @Jeff Sheraton basically, you can now fully write off assets that have a useful life of 20 years or less. Since rental properties are depreciated over 27.5 years, they don't qualify for 100% expensing. But ripping up the old driveway and replacing it with a new one would qualify for 100% expensing because land improvements have useful lives of 15 years.



    @Brandon Hall Would this then mean that if you do a cost seg study and a lot of items come in under that 20 year mark, they could be immediately depreciated? Example I'm closing on a $4.25m apt complex and doing a cost seg study. So if the parking lot ends up being valued at $50k for a 15 year depreciation, I wonder if I could write that off completely next year? 

    Where did you see that a driveway only last 15 years? IMO a concrete driveway should last forever!

     We don't want the IRS to think it lasts forever or you couldn't write any of it off!

     I know, but is there an IRS guidance that tells you the expected lifespan of property improvements? For example, how many years should a central AC system be depreciated? 27.5yrs or 10yrs (manufacture warranty)?

    0Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Joe Splitrock allocating more value to land would really only work for new acquisitions, not current properties. 

    0Reply
  • Derrick E.
    Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes
    8y

    OK. Just read the entire thread and I have learned a lot, but I have an important question that relates to me and other people who buy cheap properties for cash flow.

    Lets say I have 4 houses that I paid a total of $100,000 for. $25,000/each and they are all under the same name (from what I have gathered doesn't matter if its in LLC or personal name.)

    So my cost basis is $100k. 2.5% of that is only $2,500.

    Let's say my total rental income is $33,600 or $700/month for each house. To make things easy we will say I have a total of $10k in expenses such as Taxes, Insurance, Repairs, etc. That would bring my net income own to $23,600.

    20% of $23,600 would be a deduction of $4,720, but the 2.5 cost basis (or 2.5% of what I paid for the properties) is only $2,500. Does this mean I can only deduct the $2,500?

    Also another important question. Between the rentals and the W2 income, I am still under $150k MFJ. Would this mean I get to automatically throw the rest of that stuff out the window and deduct the 20% of the net income, or in this case the $4,720?


    Sorry if I am not asking things properly. I'm trying to understand this and please correct me if I am wrong on any of my assumptions. Thank you all so much for this thread.

    2Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Chase Gochnauer yes but it will apply only to new property in the first year it's in service (so if you're going for that, the cost seg needs to be performed in year 1). 

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Just read this whole thread and really found it enlightening. Can anyone comment on how or if this new bill went to a territorial system (as compared to world wide system) and How that may affect REI?
    0Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Account Closed it doesn't matter how long it lasts. The regulations deem driveways a land improvement with a useful life of 15 years.

    Who said houses only last 27.5 years? That's the useful life of rental properties. 

    HVAC is 27.5 year property. 

    1Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Derrick E. assuming that your net income of $23,600 is your net *taxable* income (meaning after depreciation and amortization), then yes you have it right - you'd be limited to the $2,500 (2.5% of cost basis). 

    But, because you fall below the $315k MFJ threshold, you'd get to take the 20% deduction on the net taxable income. 

    2Reply
  • Account Closed
    Los Angeles, CA · Member since 2017 · 6 posts · 8 votes
    8y
    Originally posted by @Brandon Hall:

    @Account Closed it doesn't matter how long it lasts. The regulations deem driveways a land improvement with a useful life of 15 years.

    Who said houses only last 27.5 years? That's the useful life of rental properties. 

    HVAC is 27.5 year property. 

     Good point. Thank you

    0Reply
  • Chase Gochnauer
    Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
    8y
    Originally posted by @Brandon Hall:

    @Chase Gochnauer yes but it will apply only to new property in the first year it's in service (so if you're going for that, the cost seg needs to be performed in year 1). 

     Thanks, that would be pretty huge savings on next year taxes.

    1Reply
  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    8y
    Originally posted by @Joseph M. Wise:

    I really hate to be the guy that uses a (fantastic) forum thread to address his own particular circumstances........but here I go!

    I have 3 questions:

    1) Regarding the non-deductibility of HELOC interest (unless it's traceable to a purchase of, say, a rental property). I have 3 HELOCs all on rental properties (not my primary residence). I can trace some of their balance to the purchases of other rental properties, but, not all. Is the untraceable portion of their interest deductible in 2018 on a schedule E? Would an LLC be required to claim all of that interest? Or is untraceable HELOC interest simply not deductible at all?

    2) I did read the entire thread, but, I just want to verify that ALL discussions which apply to the tax changes for LLCs (including the 20% gimme deduction) also apply to Schedule Es for individual returns. I've read elsewhere that an LLC is required to reap those benefits, however, it sounds like the conclusion reached here is that an LLC is not required as long as it all lands in the schedule E.

    3)  I'm sure this is a ridiculous question, but, we're all talking about creative ways to exploit this new system so....

    Let's say I have 3 rental properties.  They all show profit on their schedule Es of 10k each.  Would it be possible to create nested LLCs so that the 20% tax break ends up applying multiple times?

    So, LLC A would include property A. K1 for LLC A shows profit of 10k

    LLC B would include property B, property C, and K1 from LLC A (so that it's primary value came from properties, not from LLC A). LLC A profit of 10k gets discounted to 8k via 20% gimme deduction. Resulting K1 for LLC B would be 28K. (8k from LLC A, 10k from property b and 10k from property c)

    On my individual return I would take 20% gimme deduction from the LLC B K1 resulting in taxable income of $22,400 (instead of $24,000 if they were in one, flat llc).

    Thanks again!  This thread has been the most valuable thing I've seen on the subject!!!

    1.) tracable HELOC interest is deductible.

    2.) verified

    3.) The deduction is a personal deduction, not a business one so LLC B couldn't take the deduction.

    2Reply
  • Austin M.
    Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes
    8y
    Really?  What happens if you are $316k MFJ.  Are you then screwed? It seems that the phaseouts would then apply (20% over each 100k married)


    Also I feel you have to be a real estate professional in order to claim this.  Which everyone who can qualify should so you don't have to pay the 3.8% NII tax also.


    Originally posted by @Brandon Hall:

    @Derrick E. assuming that your net income of $23,600 is your net *taxable* income (meaning after depreciation and amortization), then yes you have it right - you'd be limited to the $2,500 (2.5% of cost basis). 

    But, because you fall below the $315k MFJ threshold, you'd get to take the 20% deduction on the net taxable income. 

    0Reply
  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    8y
    Originally posted by @Brandon Hall:

    @Austin M. where did you see that land is not included? Here is the code:

    ‘‘(ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

    ‘‘(6) QUALIFIED PROPERTY.—For purposes of this section: 

    ‘‘(A) IN GENERAL.—The term ‘qualified property’ means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—

       ‘‘(i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,

       ‘‘(ii) which is used at any point during the taxable year in the production of qualified business income, and

       ‘‘(iii) the depreciable period for which has not ended before the close of the taxable year. 

    ‘‘(B) DEPRECIABLE PERIOD.—The term ‘depreciable period’ means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of— 

       ‘‘(i) the date that is 10 years after such date, or 

       ‘‘(ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to sub2 section (g) thereof).

     I also read it as land being not included. 

    ‘‘(A) IN GENERAL.—The term ‘qualified property’ means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—

    4Reply
  • Billie Miller
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    8y

    It was my understanding that at one point the House plan subjected income from rentals to FICA. That is not in the final bill, correct???

    0Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    Strategy #2

    If you have the option of being paid on a 1099 basis (as a contractor) rather than a W-2 (employee), and if you make less than $157,500 if single or $315,000 if married, then you need to take a really hard look at making the switch to 1099 pay.

    Doing so will allow you to qualify for the 20% freebie deduction.

    Example: You make $100,000 as a W2 employee. You have no other income, and you're not married. You take the standard devolution of $12,000 so your net taxable income is $88,000.

    On the flip side, you make $100,000 as a contractor. You take the standard deduction of $12,000 AND $20,000 (20% of $100,000). Your net taxable income is $68,000. 

    The tax savings will be roughly $4,500. 

    Obviously this is a very high level example meant for illustrative purposes only. 

    6Reply
  • Austin M.
    Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes
    8y
    Correct

    Originally posted by @Billie Miller:

    It was my understanding that at one point the House plan subjected income from rentals to FICA. That is not in the final bill, correct???

    1Reply
  • Austin M.
    Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes
    8y
    This is true. The biggest issue is loss of health insurance and possible lower job security.

    Originally posted by @Brandon Hall:

    Strategy #2

    If you have the option of being paid on a 1099 basis (as a contractor) rather than a W-2 (employee), and if you make less than $157,500 if single or $315,000 if married, then you need to take a really hard look at making the switch to 1099 pay.

    Doing so will allow you to qualify for the 20% freebie deduction.

    Example: You make $100,000 as a W2 employee. You have no other income, and you're not married. You take the standard devolution of $12,000 so your net taxable income is $88,000.

    On the flip side, you make $100,000 as a contractor. You take the standard deduction of $12,000 AND $20,000 (20% of $100,000). Your net taxable income is $68,000. 

    The tax savings will be roughly $4,500. 

    Obviously this is a very high level example meant for illustrative purposes only. 

    1Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Account Closed nicely done. So land is not included in the unadjusted basis. 

    0Reply
  • Billie Miller
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    8y
    Originally posted by @Austin M.:
    Correct

    Originally posted by @Billie Miller:

    It was my understanding that at one point the House plan subjected income from rentals to FICA. That is not in the final bill, correct???

     Awesome! I lost some sleep over that one.

    0Reply
  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    8y
    Originally posted by @Brandon Hall:

    @Derrick E. assuming that your net income of $23,600 is your net *taxable* income (meaning after depreciation and amortization), then yes you have it right - you'd be limited to the $2,500 (2.5% of cost basis). 

    But, because you fall below the $315k MFJ threshold, you'd get to take the 20% deduction on the net taxable income. 

     When I read it, the second limitation (25% of W-2 plus 2.5% of property) is applied no matter what your income level is and the "W-2 wage limit" (50% of W-2 wages) is the one that you only have to factor if you have taxable income above thresholds.

    0Reply
  • Austin M.
    Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes
    8y
    Yes this could of crashed the rental market!

    Originally posted by @Billie Miller:
    Originally posted by @Austin M.:
    Correct

    Originally posted by @Billie Miller:

    It was my understanding that at one point the House plan subjected income from rentals to FICA. That is not in the final bill, correct???

     Awesome! I lost some sleep over that one.

    1Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Account Closed it appears that both limitations are not applied if you are below the threshold. Paragraph 3 eliminates subparagraph B of paragraph 2 if you meet the taxable income thresholds. See text:

    ‘‘(3) MODIFICATIONS TO LIMIT BASED ON TAX21 ABLE INCOME.—

    ‘‘(A) EXCEPTION FROM LIMIT.—In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).

    Paragraph 2 states:

    ‘‘(2) DETERMINATION OF DEDUCTIBLE AMOUNT FOR EACH TRADE OR BUSINESS.—The amount determined under this paragraph with respect to any qualified trade or business is the lesser of— 

    ‘‘(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

    ‘‘(B) the greater of— 

       ‘‘(i) 50 percent of the W–2 wages with respect to the qualified trade or business, or 

       '‘(ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

    2Reply
  • Austin M.
    Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes
    8y
    So if you are cash flowing good then don't make over $315K a year.

    Originally posted by @Brandon Hall:

    @Account Closed it appears that both limitations are not applied if you are below the threshold. Paragraph 3 eliminates subparagraph B of paragraph 2 if you meet the taxable income thresholds. See text:

    ‘‘(3) MODIFICATIONS TO LIMIT BASED ON TAX21 ABLE INCOME.—

    ‘‘(A) EXCEPTION FROM LIMIT.—In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).

    Paragraph 2 states:

    ‘‘(2) DETERMINATION OF DEDUCTIBLE AMOUNT FOR EACH TRADE OR BUSINESS.—The amount determined under this paragraph with respect to any qualified trade or business is the lesser of— 

    ‘‘(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

    ‘‘(B) the greater of— 

       ‘‘(i) 50 percent of the W–2 wages with respect to the qualified trade or business, or 

       '‘(ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

    1Reply
  • Joseph Delia
    Investor · Kirkland, WA · Member since 2016 · 31 posts · 26 votes
    8y
    Originally posted by @Joel Owens:

    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.

    This is a common way of stating things that actually builds a misconception that small businesses are better for (or bigger drivers of) the economy than large corporations.  Economic theory (I'm no teacher) says this is not true.  Large companies, in particular those that drive strong international trade, lift all boats.  Many, many, many small businesses could not exist at all if it were not for the large companies they operate alongside.  For example, what good is a bunch of dry cleaners in a town where the company with the well paid suit wearers just went out of business.  Etc. Etc.

    Corollary:  If you want to start a small business, you're more likely to be successful if you put it in a corporate boomtown (unless you're some sort of Etsy type or something).

    1Reply
  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    8y
    Originally posted by @Angel S.:

    @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?

     @angel s. 100% bonus is retroactive to 9/28/2017 so this driveway would be eligible for bonus in 2017.

    3Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    From what I read, bonus depreciation can be taken even if the property was placed in service on the last day of the year. It sounds like even if I fix the roof on a rental and then move back into it, I can still take the 100% bonus depreciation for the roof.

    https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/0409_estate_financialplanning.html

    1Reply
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