Breaking: Tax Extenders Signed into Law! Here’s What to Do BEFORE 12/31

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Breaking news! The President has signed the Protecting Americans from Tax Hikes Act of 2015 (PATH) into law, and we finally know the fate of tax extenders for the 2015 tax year. However, even better than that is that these great credits and deductions have also been extended through 2016, and some have even been made permanent. Let’s look at a few of extenders that may benefit you as a real estate investor.

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Section 179 Expense

Section 179 expense up to $500k has been made permanent with the new bill. It allows some qualified assets to be fully depreciated in the first year. For example, if you purchase $50,000 worth of new tools for your fix and flip business, instead of depreciating a small portion each year for five years, you can potentially expense the full amount in 2015.

The great thing about Section 179 deductions is like many write-offs, you do not need a legal entity to take advantage of it. Whether you operate as an LLC, a corporation, or a sole proprietor, many of the depreciable assets you purchase for your business may be eligible for the immediate write-off under Section 179.

Vehicles may also be eligible for Section 179 deduction, so if you use your personal vehicle for your business, make sure that you are taking the maximum depreciation deduction possible. Car expenses can sometimes be one of the largest deductions to reduce our tax bill. One catch is that the vehicle must be a purchase. Leased vehicles are not eligible for the Section 179 deduction because you are not technically the owner of the car.

Related: How to Strategically Plan Holiday Business Travel to Maximize Tax Deductions

Bonus Depreciation

Another great tax benefit that the government signed recently was the 50% bonus depreciation. Bonus depreciation allows us to take an immediate 50% write off on certain assets that would otherwise need to be depreciated over many years. Not only has bonus depreciation been extended for 2015, it has also been extended through 2017. Under PATH, the bonus depreciation will decrease to 40% in 2018 and to 30% in 2019.

Just as with Section 179 above, legal entities are not required for bonus depreciation. However, in order for an asset to qualify for bonus depreciation, the asset must be a brand new and you must be the first owner of the item. For example, let’s say you leased brand new equipment this year from your local hardware store. If you later decided to purchase it in 2015, this equipment would not be eligible for the bonus depreciation because you were not the original owner; the hardware store was. On the other hand, if you purchased a piece of equipment from the hardware store in early 2015, you would still potentially be able to take bonus depreciation on this equipment even though it was purchased prior to the signing of this PATH bill.

If you purchase new assets such as appliances, flooring, or furniture, then you may be able to take 50% bonus depreciation in 2015.

Bonus depreciation also applies to vehicles used for your real estate business, and oftentimes both bonus and Section 179 depreciation can be taken in the same year for autos. For example, if you purchased a brand new large truck for $50k, it is possible that you can use these two tax breaks to write off up to $25k of tax deductions immediately in 2015 (if not more).

Energy Efficient Home Credit

If you are in the business of building homes, then perhaps you may want to put some thought into the carbon footprint of your next project. The Energy Efficient Home Credit has been extended through 2016 and offers up to a $2,000 credit for contractors depending on the energy efficiency of the newly manufactured home. This credit is based off of heating and cooling consumption and how your new home’s use stacks up against similarly constructed homes. Make sure that you receive a certificate prior to selling the new home to confirm that you can take the credit for 2015.

Related: Breaking: New Tax Change Could Save Thousands for Real Estate Investors!

Other Credits

Here are a few other general credits and deductions that were extended with the new bill that you may benefit from this filing season:

  • State and local sales tax can be deducted in lieu of income tax (permanent).
  • Mortgage insurance premiums can be added to mortgage interest paid (through 2016).
  • If you have children in college, you can take the American Opportunity Tax Credit which provides refundable credits for education expenses (permanent).
  • Solar panels, solar water heaters, energy efficient windows, and other energy efficient improvements to your primary home may be eligible for the Nonbusiness Energy Credit (through 2016).
  • If you discharge debt on your primary home, then it may be excluded from income and non-taxable (through 2016).

Even though there are only a few days left before the end of 2015, there are still things that you can do to take advantage of some of these great benefits. It is the holidays, after all, so maybe you should splurge on that new printer or monitor for your home office since now it may be fully deductible. Maybe it’s time for new appliances for your rental properties, especially if they are on sale for the holidays.

The passage of this bill also means great things for 2016 tax planning, since we will start the year already knowing what deductions and credits have been extended. For me in the tax world and all of us as real estate investors, it will most definitely be a happy new year.

Investors: Will you be able to take advantage of any of these credits and deductions? Any questions about these extenders?

Let me know with a comment!

About Author

Amanda Han

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

22 Comments

  1. Larisa G.

    Amanda, you said that new flooring qualify for 50% bonus depreciation. Does it mean that any new improvements that were done in 2015 qualify for 50% bonus depreciation? And can we include both the cost of materials for new flooring/improvement and cost of labor as well for 50% bonus depreciation?

    • Amanda Han

      Hi Larisa,

      Bonus depreciation does not apply to labor costs unfortunately. You will want to look at each improvement with your CPA to determine whether each item is eligible for bonus depreciation or perhaps another accelerated deduction. Thank you for reading and commenting!

    • Amanda Han

      Hi Tom,

      The COD for primary home is not part of Sec 179. Principal residence COD exclusion is extended to debts discharged before January 1, 2017. In addition, the Act modifies the exclusion to apply to discharges that occur in 2017 if the discharge is pursuant to a written agreement entered into in 2016. (IRC §108(a)(1)(E); Act §151)

    • Amanda Han

      Matt,
      Rental expenses apply regardless of your income. If your income is over $150k then there is a possibility that some expenses are not used to offset your current income but can be carried to future years to offset future income.

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