Hot off the Press: Real Estate Loopholes and Limitations in the New Tax Bill

by | BiggerPockets.com

After much debate and several rounds of changes, the U.S. Congress has passed one of the most comprehensive tax changes in recent history. Within the tax reform, many deductions will be taken away, but many new tax loopholes and benefits will be available for the first time.

Amanda Han has created a new video detailing the tax implications for YOU. Normally priced at $40, we’re offering it FREE with a purchase of her book, The Book on Tax Strategies for the Savvy Real Estate Investor. Visit the BiggerPockets Book Store to learn more.

For real estate investors, there are things that you can do today to take advantage of the upcoming tax change and save taxes in the long run. Although the majority of the tax changes will take place in 2018, there are a few changes that actually impact the 2017 year. With the details of the tax changes finally revealed, we now have a better idea on what action items to consider to position ourselves for lower taxes for 2017 and beyond.

Here are the highlights of some of the more important parts of the tax change that may be impactful to real estate investors:

16 Highlights of the New Tax Bill

1. After much debate, the primary home gain sale exclusion did not change.

It remains at $250k/$500k for single/married couples and is eligible for properties that are lived in as a primary home for at least 2 out of the last 5 years.

2. Home equity line of credits (HELOC) for primary homes are no longer tax deductible starting in 2018.

However, if the HELOC proceeds are used to acquire or improve an investment property, the related HELOC interest remains tax deductible, so make sure that you are tracking your interest expenses accurately. HELOC proceeds taken out on investment properties continue to be tax deductible provided proceeds are used for investment properties and not personal expenses.



Related: The Tax Implications You MUST Understand Before House Hacking

3. Interest deduction is limited to the first $750k of debt taken out after 12/15/17 on primary and second homes.

Similar to above, if the primary home loan proceeds are used for investment properties, the entire interest expense may be tax deductible against rental income and escape the new limitation. Mortgage interest, however, for investment properties continues to be tax deductible without the $750k limitation.

4. Business entertainment expenses are no longer tax deductible starting in 2018.

Therefore, consider prepaying for entertainment expenses by 2017 year-end if appropriate.

5. In the past, certain business-related meals were 100% tax deductible.

Starting in 2018, all business meals will be limited to 50%.

6. If you are an investor purchasing business assets (equipment, furniture, fixtures, appliances, computer, etc.) for your real estate activities, there is now a 100% bonus depreciation deduction available if the asset is purchased after 9/27/17.

This results in an immediate write-off of the expense versus the need to depreciate it over time. For the first time, the bonus depreciation applies to both new and used items. Bonus depreciation can be applied to vehicles used in a real estate business although subject to certain limitations.

7. Section 179 now allows for certain taxpayers to take an immediate deduction of up to $1M on assets placed in service for a business.

In the past, this excluded real estate activities, but starting in 2018, this is now available to non-residential real estate and appears to be available for lodging businesses such as a dormitory and Airbnb. Examples of eligible assets may include roofs, heating, HVAC, fire protection, and security systems.

8. The new tax bill limits the deduction of certain business interest expense to 30% of taxable business income.

Luckily, most real estate businesses are exempt from this limitation.

9. Although 1031X is repealed for most business assets, it remains intact for real property.

As such, 1031X is still a solid strategy for investors looking to sell our rentals and defer taxes down the road.

10. If you do decide to sell a property outright, capital gains rates remain in effect under the new law.

Therefore, holding properties for over one year can qualify for a lower tax rate as in previous years.

Related: If My Income Phases Me Out of Real Estate Tax Benefits, Should I Stunt My Growth Plans?

11. Although it was in the original proposals to accelerate depreciation of commercial and rental properties, the final bill did not give us this tax benefit.

Depreciation for residential and commercial properties remains at 27.5 years and 39 years, respectively.

house-hacking-tax

12. Tax preparation fees are no longer deductible in 2018 as an itemized deduction.

However, the fees are still deductible against rental income so make sure to allocate a reasonable percentage of your tax preparation fees to Schedule E to lock in that tax benefit.

13. The amount that is free from estate taxes has doubled to $11M for single people and $22M for married people.

Taxpayers also continue to receive step-up basis upon death. As such, for many investors who are under the exemption amount, it may still be a good strategy to wait to transfer appreciated investment properties to beneficiaries upon death to obtain tax-free gain during the investor’s lifetime.

14. With the C Corporation’s new lower tax rate of 21%, certain active real estate business may pay lower taxes by operating in this entity structure.

Although corporation tax rates are lowered, the downside of double-taxation still remains in effect, so make sure to discuss any entity modifications thoroughly with your tax advisor before making any changes to your entity structure. For the many investors who own rental properties, C Corporations are still not recommended to hold title to these rentals from a tax perspective.

15. The new tax reform provides certain flow-through business income with a 20% deduction, which essentially makes 20% of the profit to be tax-free.

This benefit is available for income earned through LLCs, S Corporations, Partnerships, Sole Proprietorships, and Schedule E rentals. Certain service based businesses will not qualify if the taxpayer’s taxable income is above $207k/$415k. For non-service based businesses with income above 157k/315k, additional limitations need to be factored in if taxable income is above this threshold. This deduction does not apply to interest, dividends, and capital gains income.

16. Prior to the passage of the tax bill, investors involved in flipping were generally eligible for a Domestic Production Activity Deduction (DPAD) on their earnings.

This deduction has been repealed in the new law.

Although not every deduction listed is favorable, the new tax law allows for a lot more flexibility and tax planning opportunities for real estate investors. The good news is that since most of the changes start in 2018, there are plenty of time for planning opportunities. Make sure to keep in touch with your tax advisor to plan accordingly for 2018 and beyond to keep more of your hard-earned money.

Questions? Comments?

Leave them below!

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.

72 Comments

  1. Kyle Hipp

    I think the biggest one for me has to be the 20% deduction for pass-through businesses. I left my day job this spring and noe just run my real estate investments and construction business fulltime. Unless, I am mistaken, that means that my taxable income next year (all from the businesses) will be reduced by 20%.

    Let’s say the rentals bring in $30,000 and construction business $70,000. Total passthrough taxable income at $100,000. So now, I will only be taxed on $80,000 after applying the deduction. Is that an accurate summary?

  2. Allan Rosso

    Really enjoyed your book Amanda, it pushed me to finally contact a CPA to plan for this coming tax season. However, as soon as I mentioned owning an investment property in a different country, he said he may have to refer me out, and I haven’t heard from him since. Maybe he isnt very real estate saavy?
    I enjoyed reading your article!

    Allan

  3. David M.

    @Justin, regardless of your political affiliation, the entire country has been given 5-6 days when many people are on vacation to digest the implications of this bill to know if certain transactions should be done by the end of the year. Wait and see can cost people a lot of money.

  4. Hernan B.

    Do all my properties have to be titled under my LLC to take advantage of the pass through deduction?

    Is there anyway for my wife to take advantage of this as an independent consultant for direct sales company? Should we start an LLC for her?

  5. William Morrison

    Bonus Depreciation might decouple your state from your federal return.
    Maryland was one of what I think became 34 states that decoupled if the bonus deprecation was used.
    And you may not be able to use it if the same real estate professional rules apply.
    Brandon I’m sure has an answer that might be a little more to the point.

    It took Maryland three years before even their tax office could explain clearly what to do if you decoupled the last time.
    Basically you fill the federal forms out with and without the bonus depreciation for the life of the asset being depreciated and used the second one with your state filing. That could be 27 years.

    As I remember the Maryland tax loss was over $800 million per year, thus they didn’t like it much.

  6. John Murray

    Big winners are as usual portfolio, passive and capital gains crowd. The big losers earned income (both W-2 and Self Employed) crowd and especially earned income upper middle class SALT states (North East, NC and the Golden State). There goes real estate values in the tri-state area and California. First time in history both coast got the shaft, ain’t that American you and me.

    • Laurel Devine

      I guess you don’t understand the tax changes. I would suggest you read the article again and do some calculations. How you came up with this assessment is obviously just a political statement. We get it, you hate Trump. But please at least educate yourself on the bill (now law, actually) and stop the political banter. The tri-state area’s real estate has been in the toilet for 12+ years because of the ridiculously high property taxes ($10,000+ on a middle class neighborhood’s 3 bedroom 1 1/2 bath cape cod…). If you actually look at the tax ramifications (as I did as both a primary residence and investment property owner throughout the tri-state area) our local property taxes (which have NOTHING to do with this bill, will go up even higher because our new governor said he WILL raise them), but the federal bill is a wash – it takes away part of the mtg deduction but gives back more in credits. From what our CPA can tell so far we will come out SLIGHTLY ahead of the game because of the federal changes, unless the governor raises our property taxes again.

        • John Murray

          Hi John,
          I grew up in Monmouth County and left when I 18 for the Army. I never lived there ever again, the place is a crap hole. I became a multimillionaire in the west. Both houses of Congress from the Salt states voted against the Bill from these states. I have cousins that are high upper middle class earned income people. One in the City and one in Short Hills NJ. They will pay more taxes then before the Act. Maybe they can click their heels and they will be back in Kansas before they know it. Happy Holidays North East, California and North Carolina you are going to have to change your game plan.

      • Jordan Solomon

        Laurel,

        I don’t know if you’re still reading responses, but if you are, this is potentially very useful information and I was wondering if you (or anyone else who might know) could elaborate on this a bit. In particular, what credits are you referring to? Thanks.

  7. When income passes through my LLC and receives a 20% standard deduction it goes to my personal income. At that point can that same income additionally receive the 24k personal standard deduction?

  8. Amanda:
    Thanks for a timly and informative article on the 2018 tax changes. I am expecting to get your tax book under the Christmas Tree this year……

    Best wishes,

    Kirk Kitchin

  9. Buddy Holmes

    Thanks for the great article Amanda!

    Your Item 6 about 1005 write off of rental property improvement/replacements of those articles if purchached after Sep 2017: Do that allow the deduction on 2017 tax return if they meet the definitions you laid out?
    Or is this to be deducted on the 2018 return?

  10. Amanda, I report investment property income on Schedule E. Your article says Sched E will. Enefit from the 20% defection for pass through income. Where do you see that in the new law? Other commentators refer only to partnerships and s corps. Do I need to move these properties to an s Corp to take advantage of the new law, or will they be ok as schedule E?

  11. Len Grosso

    Thanks for a terrific distillation of a complicated subject.
    The article mention that there is ‘plenty of time’ (=> before Dec 31) and is not dated, which begs the question; are the points above consistent with the final signed tax law?

  12. Carolyn Lorence

    Thank you Amanda – Excellent summary. Question regarding business expenses incurred in 2017, such as travel expenses related to rental property search and acquisition, when the property is actually purchased in 2018. Are these expenses tax deductible in 2017? Or are the carried over to 2018 when the actual purchase takes place?

  13. Aaron Cater

    It looks like a lot of people think they will get the full 20% deduction on all their LLC or SCorp profits. The 20% is AFTER the amount you have paid yourself. So if your SCorp makes $200,000 and you pay yourself an $80,000 a year salary, you only get the deduction on the $120,000 in pass through profit.

  14. Dean Lemont

    Thank you, Amanda, and Happy New Year! I’ve had this article bookmarked to read since it came out, learned and solidified a lot (glad I finally dug into it!) and I’ve also been enjoying your recent conversations with Bruce Norris on his podcast as well. Really appreciate you breaking things down so clearly.

    Cheers!

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