New Tax Law - Big Boost for Small Investors

17 Replies

This intended only to open discussions on the changes that affect investors. This is to help you know what questions to ask your CPA so you can do a better job of tax planning. I am not a tax guy or a tax attorney so this is simply a list of things you may want to consider talking with your accountant about.

1) Are you conducting yourself as a "Trade or Business" - if you are not, you are missing out on the greatest deductions and benefits. A "fix & flip" or "actively managed buy & hold" are generally good to go. Wholesalers may fall out of being a "Trade or Business". Passive investors (living off of dividends, etc ) may fall out of being a "Trade or Business".

2) If you make less than $157,500 yearly filling single or less than $315,000 married filing jointly, you are in a "sweet" category and are most blessed. Thank President Trump. You get the best write offs and benefits.

3) If you make more than those amounts (bless you, keep it up) talk to your CPA. You can afford one. And you should plan ahead since the changes are substantial.

4) LLCs are "pass through" and don't really affect your bottom line.

5) Learn the Term - "199A: Pass-Thru Deduction" - it is your friend (Must be a "Trade or Business")

6) Keep *very good* records - NO co-mingling - if you don't know how to do this, have an account set up a system for you

7) If you Assign Contracts or Options, (Wholesaling) you probably are NOT a "Trade or Business" for Tax Purposes and are missing out on a lot of good deductions and benefits. Consider adding a "Trade or Business" to your line of work. 

Hi Mike

I'm not sure what your CPA told you but a few things here are off base....

Wholesaling is an active business and will qualify for the 20% pass through deduction

Additionally, it applies to schedules C,E,F- Meaning that you can have a business, rental, or farm and still qualify for this pass through deduction. An LLC has no impact on this issue.


There have been a handful of posts on the new tax legislation already going here on BP :)

@Mike S. @Natalie Kolodij is correct on the wholesaling income. Though wholesaling is likely considered a service based business and subject to the phase outs after taxable income hits $157.5k and $315k (if married).

Side question: what is a trade or business?

Originally posted by @Natalie Kolodij :

Hi Mike

I'm not sure what your CPA told you but a few things here are off base....

Wholesaling is an active business and will qualify for the 20% pass through deduction

Additionally, it applies to schedules C,E,F- Meaning that you can have a business, rental, or farm and still qualify for this pass through deduction. An LLC has no impact on this issue.


There have been a handful of posts on the new tax legislation already going here on BP :)

 He is a Tax Attorney that practices in front of the IRS. I don't speak for him, though. I do know he wins when he takes a case to tax court. 

You say "Wholesaling is an active business and will qualify for the 20% pass through deduction"

Please give us your definition of "Wholesaling". We may be saying the same thing, maybe not.

Wholesaling would be either....

Putting a property under contract to sell the contract

Putting a property under contract completing a double escrow t sell

Putting a property under contract and double closing to sell

And potentially birddogging

Either way, You're actively participating in a business.

I didn't mean to imply that your tax attorney wasn't good at his job- however if this is the information directly from him there was some accuracy lost in translation.

Originally posted by @Natalie Kolodij :

Wholesaling would be either....

Putting a property under contract to sell the contract

Putting a property under contract completing a double escrow t sell

Putting a property under contract and double closing to sell

And potentially birddogging

Either way, You're actively participating in a business.

I didn't mean to imply that your tax attorney wasn't good at his job- however if this is the information directly from him there was some accuracy lost in translation.

 Thank you for clarifying.

Again, as I say in my post

"7) If you **Assign** (emphasis added by me) Contracts or Options, (Wholesaling) you probably are NOT a "Trade or Business" for Tax Purposes and are missing out on a lot of good deductions and benefits. Consider adding a "Trade or Business" to your line of work. 

It is *how** you put that property under contract that is the operative word. It's "okay" to actually *buy** and wholesale. The problem comes in when it is Assigned. Most Wholesaler's **assign** 

(and then they are potentially practicing real estate agency, which is illegal in several states, but that is a separate issue. ;-)

I will defer to you Natalie if you contact a Tax Attorney and find that **assigning** qualifies.

Otherwise, "Wholesalers Beware", you may have a nasty Tax Bill when taxes are due. Check with your Tax Attorney. ;-)

Originally posted by @Brandon Hall :

@Mike S. @Natalie Kolodij is correct on the wholesaling income. Though wholesaling is likely considered a service based business and subject to the phase outs after taxable income hits $157.5k and $315k (if married).

Side question: what is a trade or business?

 Glad to have you chime in. (Tho' this is getting way too deep in the weeds for most people) ;-)

You ask "Side question: what is a trade or business?"   This is from a Tax Attorney's website (not my attorney's someone else"

Layman’s version of Deduction for Qualified Business Income of an Individual under Sec. 199A

The Qualified Business Income tax deduction gives the owners of pass-through businesses like sole proprietors, partnerships, S corporations and real estate investors a deduction equal to 20% of qualified business income.

What is Qualified Business Income?

The qualified business income includes the profit from an active trade or business and then also rental income as long as you operate as a pass-through entity.

More specifically, this means your qualified business income includes the net income from an active trade or business as shown on the Schedule C and in box 1 of a partnership or S corporation K-1, the net rental or royalty income shown on Schedule E and in boxes 2 and 3 of a partnership or S corporation K-1, and then not the capital gains but rather the Sec. 1231 gains that may occur when a business sells assets used in the business.

Qualified business income also includes REIT dividends, qualified coop dividends and qualified publicly traded partnership income of the taxpayer.

What is not Qualified Business Income

Qualified business income amount does not include reasonable compensation paid to S corporation shareholders nor does it include guaranteed payments paid to partners.


@Mike S.

Wholesaling is Active trade or business. 

And Brandon was not asking about the "Qualified Business Income". I am pretty sure he knows that. 

What he was trying to say was there is no clear guidance on what is " trade or business".  The court looks at all the facts and circumstances if there is an issue.  for eg., There have been cases where Rental does not qualify for trade or business and sometimes it does. 

However, wholesaling is going to be 100% trade or business. Wholesaling is done with the profit motive and is done continuously and regularly. That makes it active trade or business. 

Originally posted by @Ashish Acharya :

@Mike S. , 

Wholesaling is Active trade or business. 

And Brandon was not asking about the "Qualified Business Income". I am pretty sure he knows that. 

What he was trying to say was there is no clear guidance on what is " trade or business".  The court looks at all the facts and circumstances if there is an issue.  for eg., There have been cases where Rental does not qualify for trade or business and sometimes it does. 

However, wholesaling is going to be 100% trade or business. Wholesaling is done with the profit motive and is done continuously and regularly. That makes it active trade or business. 

 I'd love to have a Tax Attorney weigh in but we will have to wait. 

I seem to recall that the issue was that a Wholesaler is relying on his "reputation" and "skill" only, when he **assigns** and that creates the problem. The solution is to actually buy the property then Wholesale it. 

Not every pass-through entity gets to use the Sec 199A Qualified Business Income deduction though. It has some defining terms that are crucial to note. Pass-through entities and structures include Sole proprietorships (no entity, Schedule C), Real estate investors (no entity, Schedule E, Disregarded entities (single member LLCs), Multi-member LLCs, Any entity taxed as an S corporation, Trusts and estates, REITs and qualified cooperatives.

Specified Service Trade or Business is defined as traditional service professions such as doctors, attorneys, accountants, actuaries and consultants, performing artists who perform on stage or in a studio, paid athletes, professionals in the financial services or brokerage industry and “any trade or business where the principal asset is the reputation or skill” of the owner.

@Mike S.  

Two of the most active tax pros on BP weighing in on this- I can also assure you that @Steven Hamilton II @Linda Weygant @Jake Hottenrott ....will also agree with Brandon and myself. 

Whether you ASSIGN a contract aka sell a contract 

or close and sell a house 

You're an active trade or business. Period. You're operating in buying and selling items for profit. That's operating a business. 

Some pass throughs are limited on the deduction- these are personal service corps. This doesn't apply here. 

I would strongly advise that if you are not a tax professional to not provide tax advice publicly. And please do not advise I consult with a tax attorney. This is not the only type of qualified tax professional. 

This thread makes my head hurt.

@Natalie Kolodij , @Brandon Hall and @Ashish Acharya have it down.  Wholesaling is an active trade or business.  Whether you "purchase" the property and then sell it or you **assign** it, it really makes no difference.  I would bet that of the wholesalers we work with, a majority never own the property.  

@Mike S. , you want a real estate/tax attorney to weigh in on this.  I present to you an article from Lee Chen, CA attorney,  that lumps "**assign**ment" wholesaling in with wholesaling in general.

https://kkoslawyers.com/legal-tips-for-wholesaling-real-estate/

- Not all wholesalers are assignors, but all assignors are wholesalers.  

@Mike S. all service businesses qualify for the pass through deduction as long as the taxpayer’s taxable income is less than $157.5k if single and $315k if married.

@Mike S. , I think you have your questions answered in all details by the top pros on BP. 

Just one thing to add, what @Brandon Hall meant to say in his latest post, is that all service businesses qualify for full deduction if taxpayer's taxable income is less than $157.5k if single and $315k if married, and the deduction will phase out between $157.5k and $207.5k if single and $315k and $415k if married.

Originally posted by @Natalie Kolodij :

@Mike S.  

Two of the most active tax pros on BP weighing in on this- I can also assure you that @Steven Hamilton II @Linda Weygant @Jake Hottenrott ....will also agree with Brandon and myself. 

Whether you ASSIGN a contract aka sell a contract 

or close and sell a house 

You're an active trade or business. Period. You're operating in buying and selling items for profit. That's operating a business. 

Some pass throughs are limited on the deduction- these are personal service corps. This doesn't apply here. 

I would strongly advise that if you are not a tax professional to not provide tax advice publicly. And please do not advise I consult with a tax attorney. This is not the only type of qualified tax professional. 

Definitely agree and couldn't have said it better myself. 

Originally posted by @Brandon Hall :

@Mike S. all service businesses qualify for the pass through deduction as long as the taxpayer’s taxable income is less than $157.5k if single and $315k if married.

 so what about real estate agents.. are they now taxed at this lower rate as they are in the business.. don't own the asset and just make fee's like a wholesaler.. ?? or assigner ?? just curious..

@Jay Hinrichs service based business do not qualify for the full 20% passthrough deduction if the taxpayer's taxable income is above $157.5l (single) or $315k (married). 

As @Vlad K. mentioned, the deduction is phased out for service based businesses. Once over the phase out thresholds, no deduction is allowed for service based businesses.

The NAR has taken the position that real estate agents are classified as service based businesses.

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