How are investors preparing for SALT cap of $10,000 now

31 Replies

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For me I bought a home in Summerlin and moved my residency to a state with no income tax.. as I generate income in 14 states a few of which have no state income tax.. so that helps.  I paid off all but one mortgage so I have no debt to speak of.. sold all my rentals.. and moved to the debt side all interest note income.  And like every one else I paid my state income state in Oregon in December to get the full write off..

Although I don't see a real impact here in Portland were we build new homes and or in Charleston.. home owners are still buying not sure on the renter side of things though..  Peeps still have to live somewhere and there is still some benefit to owning a home than renting .. 

it could just be over building in your area as well.. you see that a lot with condo developments the lag time to get them up is so long that by the time they come to market the market cant absorb more.

Not sure in Austin other than there was from what I understand a large run up.. but I can see luxury pricing in Texas being an issue with the prop tax's that are quite a bit higher than other parts of the country but that is usually mitigated for texas residence who don't pay state income tax as there is none in Texas.. so I think texas for TExans is a great investment long term. 

So while I think your right it affects a certain segment of the market in my little world does not appear to be slowing anything down there is still a shortage of housing.

Like @Jay Hinrichs I’m moving my residency to a income tax free state; from Oregon to Washington. Of course this doesn’t affect income tax owed on my oregon rental income or job income generated in Oregon

Originally posted by @Steve B. :

Like Jay Hinrichs I’m moving my residency to a income tax free state; from Oregon to Washington. Of course this doesn’t affect income tax owed on my oregon rental income or job income generated in Oregon

 one of the most tax effective plays in the US is live and work in SW Washington with No income tax then simply drive across the river to do all your shopping TAX FREE  ..  Although traffic is an issue depending on our commute times and where you going to .

@Jay Hinrichs that’s the plan in skamania county!  Only downside is that perpetual $2 toll on the BOG

Originally posted by @Steve B. :

@Jay Hinrichs that’s the plan in skamania county!  Only downside is that perpetual $2 toll on the BOG

 got it fighting gorge weather in winter can be a challenge so I suspect you get to work from home a bunch ..

and I think that if I am not mistaken is about the wettest place in Oregon / WA  :)

Marc, where did you find that info? Specifically relating to not being able to deduct prop tax on a rental property?

As far as I understand this is unaffected as this is an expense filed on schedule C.

I’m not a cpa or tax person, but did not think that would be an issue. However I do live in California and not happy about loosing out on prop tax, as the state tax is around 8-10% already.

This should have almost no affect on investors of rental real estate. The SALT deduction is for itemized personal deductions only. Taxes attributed to rental properties are reported on Schedule E or Form 8825 for an entity. The SALT deduction is regarding Schedule A, personal itemized deductions only.

Justin Freeman, CPA

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I guess I feel bad for the clients of that army of highly paid CPA's as Section 162 trade or business expenses was unaffected by the SALT adjustment of under the TCJA. The next thing they are going to tell me is mortgage interest on business property is limited to $750,000 just like the personal itemized deduction for principal residence indebtedness. 

Now a buy and hold strategy for something like land that an investor may only be holding for appreciation, that's a different story, that very well could be affected.

I’m not sure why your CPA told you this information but it’s incorrect. You can still deduct property taxes on your investment properties as it’s a business expense.

@Account Closed

Not sure where you got your info but perhaps people were making every effort to rent out their condos to turn them into rental property? Were they previously a vacation home or second residence? Or personal residence? Because a vacation home and personal residence are limited to the $10k taxes cap because they are personal assets and therefore deductible on schedule A as an itemized deduction subject to the $10k cap. Business/investment rentals are not subject to this $10k cap as the taxes are deductible on schedule E or the entity’s business return (which likely is a flow through and will end up on schedule E anyway).

People were rushing to pay their last property tax in the end of 2017 mostly for their personal residences. It also had a bigger effect on your taxes in 2017 even for rental properties because the rates were higher. Under the new tax cuts and jobs act, the same income amount is now in a lower marginal bracket. So if you are going to pay the same dollar amount for property taxes in December versus January, then might as well get a deduction at a higher tax rate.

Perhaps you are seeing less luxury rental sales because they tend to be second homes rather than rentals....

Also that bit about higher chance of audit... are you maybe thinking about the SALT work-arounds that NY and other states like CA and CT are proposing? Such as paying your state taxes to a ‘charitable’ fund in the state of CA to be able to deduct your state taxes as a charitable deduction not subject to a 10k cap instead of as taxes paid. The IRS has come out with a notice saying those schemes will be highly scrutinized.

Again, not sure where you got your info. Investors’ property tax deductions are not at risk for anything but their personal residences. You might want to ask your CPA again or seek out another CPA.

You also might want to look into the new section 199A pass though deduction to see if you are eligible for any benefits or deductions on your pass through income. This should be an extra little tax break for most real estate investors.

*this post does not constitute legal advice and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client nor a cpa-client relationship.

Originally posted by @Marc Roth:

The new tax law starting in 1/1/2018 states you’re now capped out at $10,000 for SALT. There is no distinction between investment and home ownership in the law. That means you can’t legally deduct anymore then $10,000 for all State and local taxes. In the past this was unlimited. If taken you’ll run the risk of an audit down the road. 

  

Thankfully, this is not true.  You can still fully deduct property taxes paid on rental properties, even if over $10k.  If your CPA told you differently, it's time to get a new CPA.  (I'm guessing you might have misunderstood him though.)

There's plenty of previous discussions here on BP on this topic.  Here's one of the longer ones where some of our regular CPA posters answer this very question: THE Thread on the Final GOP Tax Bill - Q&A

With that being said, if you really want to pay extra taxes, I'm sure the government will be happy to accept it.  :)

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Originally posted by @Marc Roth:

Hey take your shot Kyle J. 

If by chance the IRS doesn't see it your way I'm sure you won't mind paying them what you may have misunderstood. After all we are only human so we make mistakes. It's also up to interpretation so I'm sure you can find good representation if needed. 

You're right in the middle of a real estate tax area so that's probably where they will be looking eventually like here first for any violations and possible audible returns. 

I get my information (and my representation) from my tax attorney.  So I feel pretty safe. 

I'm not a tax expert but all of us lay people seem to disagree with your opinion.  I'm curious if any tax experts will come on here and confirm your understanding of the new law.  @Brandon Hall ? @Amanda Han ? @Michael Plaks?

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Good idea, @Kyle J.

This is a very important topic and bears input from professionals.  There is a massive number of people on this forum that would be effected by a change in this deduction.  When I checked in with my accountant a few months ago, she was confident that property tax on what was clearly identified as an investment property could be deducted on a schedule E.  In saying that, she was also clear that I had built up substantial history that indisputably puts the property in an investment class, not a vacation home masquerading as a rental.  

Your CPA is categorically wrong, or you have misunderstood him. 

One just need read the law for a very easy understanding

The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212.

And then the reference from the above law to IRS Code 212

(1) It has been paid or incurred by the taxpayer during the taxable year (i) for the production or collection of income which, if and when realized, will be required to be included in income for Federal income tax purposes, or (ii) for the management, conservation, or maintenance of property held for the production of such income, or (iii) in connection with the determination, collection, or refund of any tax; and

(2) It is an ordinary and necessary expense for any of the purposes stated in subparagraph (1) of this paragraph.

And for even simplified version, just look at the IRS guidance on the subject...

What Deductions Can I Take as an Owner of Rental Property?
If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

@Kyle J.  

100% agree with you.  I'm a CPA and attorney with both a masters degree in taxation from a business school, and a masters of laws LL.M. degree in taxation and estate planning from Georgetown Law.  @Justin Freeman on this thread is also a CPA who confirmed everyone else's opinion.  Seems to me that there are tax experts and also several lay people all with the same understanding that is not shared by @Account Closed .  However, I do not see any need for people to get nasty on these forums though, as everyone has their own trusted advisors.  Marc asked for advice, and if he chooses to take an interpretation of the law that is contrary to public view and hurts him financially, that is entirely his prerogative.  I suppose that's what keeps attorneys and CPAs in business since laws can have gray areas.  Marc, I hope people come forward with advice for you for the original question you asked, or that you find an advisor to guide you in the right direction.  Best of luck on your journey.  Here are a couple of articles for your leisurely reading though:

https://www.mlrpc.com/articles/new-tax-law-affects...

https://www.marketwatch.com/story/the-new-tax-law-...

http://www.noradarealestate.com/blog/new-2018-tax-...

*This post does not create an attorney-client relationship.  Readers are advised to seek professional advice.  The information contained in this post is not legal advice.

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Marc,

Maybe we are all talking about different things? The CPA's, tax attorney's etc. are talking about trades or businesses, i.e. rental properties. Your last paragraph is a full discussion on a residence, which I think we would all agree falls under the $10,000 SALT limitation. However a rental property is not going to lose the deduction regardless of how many people you've spoken with and told you that they will. You're just going to be giving the government a little extra money that's rightfully yours. 

If that's not the case I would encourage you to surround yourself with different CPA's and tax attorney's if they are telling you that a rental property is going to be subject to the limitation. 

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