I went through the Bigger Pockets show 269 transcript. These are the notes I'm referring too. Keep in mind I originally referenced a very specific tax law, I know that there still are many other tax advantages...
interest limitation? I think I wrote it in a note here. What was that?
Brandon Hall: Yeah, so a lot of this was breezed over, even by me initially. But after we did a second dive, we realize it’s probably going to apply to a lot more people than we originally thought. So business interest limitations—what it is, is it’s a 30% limit on pretty much your operating income, at least for the next four years, I think. It goes through 2022. So what it is, it’s a 30% limitation on what they call EBIDAT. So Earnings Before Interest Depreciation Amortization Taxes. Maybe that was it. Yeah. So if I have like $10,000 net operating income before I take into account interest taxes, depreciation, and amortization, I am now limited to a $3,000 interest deduction. So 30% of my debt operating income. You’re excluded from this if you have revenue and you have revenue of less than 25 million. So that’s like almost everybody, I’m assuming, that’s listening to this. It’s definitely me.
But there’s an exclusion to the exclusion—that’s probably not the right way to say it. There’s an exception to the exclusion that basically says if you’re running a tax shelter, then that $25 million dollar allowance does not apply to you. And the interest limitation at that point does apply to you. In the past, the tax shelter has been a bad thing. It’s an entity that’s set up purely for tax avoidance or tax evasion. There’s no real economic benefit. But in this new code section, a tax shelter simply means an entity in which more than 35% of the ownership is held by limited partners.
So if I’m a syndicator, I have probably given away 60-70% of my entity to my limited partners, my investors. All of a sudden, that subjects me to this business interest limitation. And all of a sudden, I’m scrambling to try to figure out how to not be subject to the business interest limitation. But this also applies to people that—like, let’s say I’ve set up an entity and my dad comes in and he’s a private equity and he’s a money guy or whatever, but he takes a 50% stake of my entity. It’s just me and him.
We’re not doing anything big. We’re buying little $50,000 homes. If he’s not actively involved in the business, he’s limited in that case. He’s a limited partner in that case. And all of a sudden, I’m that entity, that small entity is now subject to the business interest limitation. So it is going to apply to multiple people, not just the bigger fish.
