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

Tax, SDIRAs & Cost Segregation
8yFollow

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!

84Reply
1,670 views

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!

Podcast Guest on Show #132
Second City Real Estate4.821 Reviews
WebsiteView Page
16Reply
See this reply in the discussion

272 Replies

Jump to latestLatest
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y
    Originally posted by @Brandon Hall:

    @Joe Splitrock I don't think so. There are several ways to determine basis. (1) look up the allocation between building and land in the property assessor database; (2) look at the underwriting on your insurance policy; (3) look at the appraisal if you had one; (4) find local land listings and apply the price/sqft to your lot.

    You can use any of those methods. 

    What you can't do is arbitrarily choose a random number of 15% and say that's the land value. THAT is what will get you in trouble. If there's no evidence to support the calculation, you'll have a hard time defending yourself from any inquiry.

    So when I say allocate more basis to land, what I really mean is, among those four primary methods I mentioned above used to determine basis, choose the method that produces the highest land value. 

    We are in agreement. Like I said in my original post, I use county tax values to determine my split. For me, none of these methods would yield a significantly lower structure value. 

    1Reply
  • Taylor Brugna
    CPA · New York, NY · Member since 2016 · 203 posts · 132 votes
    8y

    @Kurt Kwart The 10k limit is only for your personal residences and state income taxes, not your rentals. I'd definitely recommend paying your property taxes on your primary residence if you think next year you'll state tax liability plus your property taxes will be over 10k. 

    For your rental properties, it's a case by case basis. Are you able to use passive losses? Did you have a great year and need some more expenses to offset some of the tax? There also is value to having tax savings now vs next year because that savings can be invested and grow over the year. 

    2Reply
  • Scott JensenPro Member
    Financial Advisor · Blaine, MN · Member since 2014 · 478 posts · 387 votes
    8y

    A few points of clarification:

    The legislation does not allow a deduction for pre-paying 2018 property taxes in 2017.

    The conference agreement also provides that, in the case of an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, the payment shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction. Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.

    @Thom H. It's below the line. It reduces Taxable Income, but not AGI.

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

    @Scott Jensen the new legislation does allow for pre-payment of property tax, but does not allow for pre-payment of 2018 income tax.

    Per the text you pasted in your post:

    The conference agreement also provides that, in the case of an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, the payment shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction. Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.

    3Reply
  • Austin M.
    Real Estate Professional · Royal Oak, MI · Member since 2012 · 32 posts · 15 votes
    8y

    A couple items I found from the Watson group:

    • Rental income remains unclear as well from a W-2 perspective. If a rental property owner earns $500,000 net income after expenses, his or her Section 199A deduction is $0. As such does the rental property owner need to issue a W-2 similar to an S corporation just to grab some Section 199A deduction? Issuing W-2s in sole proprietor, single member LLC and partnership environment is not explicitly disallowed by the IRS but is not recommended by the IRS nor tax professionals. We will see how this turns out.
    • Taxable income becomes a big deal for two reasons! First, $1 over $157,500 or $315,000 starts the specified service business disqualification and W-2 limitation (and there is also a depreciation component that we are glossing over in this summary). Second, the Section 199A deduction is limited by 20% of taxable income from all sources (what would be reported on your tax returns).
    • Barney owns three rentals with net incomes of $20,000 and $5,000, with one losing $8,000 annually. These are aggregated to be $17,000. He would deduct 20% of $17,000.
    • It appears that self-employment taxes will still be calculated on the net business income BEFORE the Section 199A deduction since the deduction is taken “below the line” on Form 1040. So you could earn $100,000 and deduct $20,000 under Section 199A, but still pay self-employment taxes on $100,000. This remains unclear however and we will await further IRS guidance.
    • Watson group also seems to think AGI not line 43 is considered the income for it.
    0Reply
  • Brandon Hall
    OP
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    8y

    @Austin M. I really enjoy Watson's content but I believe their thoughts on the rental income is incorrect. They neglected to take into account the 2.5% deduction on unadjusted basis. 

    If you receive net rental income of $500,000, and assuming your rentals (or allocable share of rentals) have an unadjusted basis of $3,000,000, and did not pay wages, your deduction is the lesser of:

    1. 20% of qualified business income = $100,000

    2. 2.5% of unadjusted basis = $75,000.

    So your deduction is $75,000.

    1Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Ben Raygor:

    @Natalie Hideg 

    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.  

    I don't think this last part is 100% accurate. I think that the 10K limit is for combined SALT and property taxes, but for new mortgages less than 750K, the mortgages interest is still tax deductible without a limit.

    0Reply
  • Steve S.
    Holbrook, NY · Member since 2015 · 2 posts · 0 votes
    8y

    Can someone tell me, with the new tax bill what is the best entity (LLC, Corp, individual) to start flipping next year 2018. Since hard money lenders require it, I was planning on forming an LLC. But with the new tax bill I'm not sure? Thanks and happy holidays

    0Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Brandon Hall:

    @Clancy Catelli you’re right on the money. But when you receive 1099 income, you can do so in an S-Corp. 

    So you receive $50k in 1099 income but since you’re taxed as an S-Corp, you pay yourself a wage of say $20k. The $20k in wages is subject to the 15.3% tax, so you pay $3,060 in FICA. The business gets to deduct the employer share of FICA, so the remaining $30k of net profit that wasn’t paid out as wages is now $28.5k. Then you deduct health insurance of $5k and you get to write off business expenses for maybe another $5k. 

    So now we’re down to $20k in wages and $18.5k in business income. We then contribute to a 401k at the employee $18k max as well as the employer 25% of your W2 - basically you are able to contribute your entire $20k of wages to the 401k.

    This leaves you with $18.5k of reportable income.

    And now we have this freebie tax deduction. 20% of your combined qualified business income which does not include wages you pay yourself. So you get another $3,700 deduction.

    And once we factor in your standard deduction of $12k, you’re at $2,800 in taxable income. This results in income tax of $280.

    Your total tax paid was the FICA of $3,340.

    —

    Compare that to earning a W2 wage of $50k. Your FICA tax will be $3,825. 

    You max out the 401k at $18k. Now we’re down to $32k. We get the standard deduction of $12k which leaves us with taxable income of $20k. That yields another $2,200 in taxes.

    —

    So W2 earner pays $6,025. The 1099 pays $3,340.

    —

    Again, this is an illustrative example. Everyone’s situation is unique and numbers will differ greatly from person to person. 

    Illustrative example but not a realistic tax scenario.  

    0Reply
  • Maxime Boucher
    Flipper/Rehabber · Bay Area, CA · Member since 2015 · 4 posts · 3 votes
    8y

    Not completely related, but after reading this carefully, is it safe to assume that if the LLC was to own bonds, debt instruments, dividend generating stocks or was to generate capital gains via selling appreciated assets (e.g.: stocks), the revenues made from those instruments wouldn't qualify for the 20% deduction?

    0Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    8y

    How does this affect me if I am building an ADU in the back yard of my rental property?? thanks!

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

    @Varinder Kumar If it's movable (like a tiny home or a mobile home) it may qualify for 100% expensing. Otherwise, you're most likely depreciated over 27.5 years. 

    3Reply
  • Dong Yan
    Real Estate Investor · Irvine, CA · Member since 2016 · 129 posts · 42 votes
    8y
    Thank you !Brandon
    Originally posted by @Brandon Hall:

    @Jocelyn Canfield true but a 1099 contractor can be paid through an S-Corp and reduce FICA exposure via paying a reasonable wage. They can deduct health insurance and other ordinary and necessary business expenses. They can max out contributions to 401(k)s at $54k per year.

    Ultimately, it’s a better to have control over your income and the corresponding deductions.

    @dong 

    @Dong Yan does not apply to rentals.

    0Reply
  • Peace Lily
    Bridgeport, CT · Member since 2017 · 116 posts · 19 votes
    8y
    Brandon Hall thanks for starting this post. I was wondering if I should sell my stocks (will have some capital gain) by the end of this year to pay some of my renovation improvements and repairs (total about $90k) on credit cards since I have zero rental income this year. Renovation just finished this month. This is 2 units multi family home where I am house hacking. Or, should I sell my stocks next year since i have high expenses this year, the capital gain can be against high expenses this year? Thank you!
    0Reply
  • Eric Ashby
    Rental Property Investor · Miami, FL · Member since 2017 · 17 posts · 19 votes
    8y

    Regarding the 2.5% deduction based on asset value on pass through income how is "unadjusted basis" calculated; is this based on the depreciable value of the asset purchased or is it net of any mortgage or financing on the property?

    0Reply
  • Elizabeth Goff
    Investor · Napa, CA · Member since 2016 · 101 posts · 53 votes
    8y

    Great thread!  

    My question is.... my income is combined business consulting and real estate income....  Since "service" consultants can only participate if under the $157k mark, I believe, what happens if it's "mixed" income and over the $157k threshold?  Can I still use the asset calculation (based on my real estate holdings) or am I out of luck since a greater portion of my income is from consulting?  Need to know how hard I should work, ha.


    Also, is there consensus on what line is being used for the income threshold?  AGI or after standard/itemized deductions?

    0Reply
  • Varinder KumarPro Member
    Real Estate Broker · LA & ORANGE COUNTY CA -Multi Family · Member since 2016 · 374 posts · 132 votes
    8y

    @Brandon Hall 

    Thank! So i would be depreciating the unit and the home it self as separate deductions? 

    0Reply
  • Danae Meurer
    Investor · Denver, CO · Member since 2013 · 34 posts · 12 votes
    8y

    Could someone chime in on the Net Operating Loss limitation of 80% of taxable income.  Because of depreciation we end up with a small business loss every year.  Will this loss now have to be carried forward?

    0Reply
  • Jason Lavender
    Flipper/Rehabber · Wichita, KS · Member since 2017 · 152 posts · 119 votes
    8y

    I think this thread could be bigger than the actual tax bill. Great stuff. 

    2Reply
  • Jared Forman
    Rental Property Investor · Philadelphia, PA · Member since 2017 · 139 posts · 107 votes
    8y

    @Brandon Hall, @Taylor Brugna, @Daniel Hyman@Thomas Castelli, @Linda Weygant, @Lance Lvovsky, @Ben Raygor, @John Woodrich, 

    @Account Closed, and all other accounting professionals

    Gentlemen & Linda,

    We have all been gathered here to discuss the GOP TAX REFORM. You are all accounting professionals with great knowledge about  the future of US tax code related to real estate. I need your help.

    There are 195 replies to the original post and a wealth of information. Since taxes is everyone favorite subject, I have made a 1- pager to be added to BP for everyone who doesn't enjoy the fine details. 

    Can you critic and make recommendations for the 1-pager?

    Thank you,

    Merry Christmas, hope you enjoy the formatting!!!

    https://drive.google.com/file/d/1xfCQcP-Vfqk9Qjk4JyLcUBZCghp_qXhu/view?usp=sharing

    0Reply
  • Stuart M.
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Account Closed:

     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).

    OK, my new LLC is providing property management to my rentals and just so happens that it works out to cost ~$400k per year. Now does my property management LLC get the whole 80k deduction?

    0Reply
  • Stuart M.
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Jack B.:

    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/publication...

     I was under the impression that anything you do before it is placed in service is added to the basis.

    Tell me that his take is correct instead!  Some of us have 8 days to make decisions!

    0Reply
  • Stuart M.
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y

    Deleted.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    How would it affect me as private lender, receiving interest income?

    0Reply
  • Varun Parkash
    Jersey City, NJ · Member since 2017 · 124 posts · 13 votes
    8y
    Please help answer my dumb question : Example: John makes 100k salary, pays 6k Nj state income tax, 12k property tax, 14k mortgage interest rate on a 550k loan for his primary residence. Now as per new rules, john can only declare 10k, but also as per new rules his mortgage is below 750k & he can declare 14k interest rate paid as well in taxes ? I thought that a combination of “state income tax + property tax + mortgage interest rate” can’t be declared on taxes beyond 10k as per my research. Correct me where I’m wrong? I want to know how and where is the 14k mortgage rate interest paid on a 550k mortgage declared on taxes?
    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free