What the 2018 Tax Reform Means for Rental Property Owners
There are only 2 things you can be sure of in life…death and taxes at least according to Benjamin Franklin in 1789. As a rental property owner, you may feel like this is evident every tax season. However, in 2018, tax law went through an overhaul.
Full disclosure, we are not accountants and we are not offering tax advice. We are landlords, property owners and property managers like yourself.
We’ve decided to look into the tax reform as much for our own knowledge as sharing it with you. We found a nice breakdown of the new tax law by Brandon Hall, Owner of The Real Estate CPA.[i]
Here are some of the deductions eliminated from the bill.
- One deduction eliminated with this bill is the Domestic Production Activity Deduction or DPAD. This was a deduction based on wages paid to crews during the course of doing business. This specifically affects developers, flippers and builders who can no longer deduct their labor costs. Yet, with the new pass-through law, if you have an LLC, LLP, S-Corp or any of the other types that pass to individual income, you’ll receive a deduction that way. We discuss the pass through law a little later.
- There was an elimination of a 10% credit of the Rehabilitation Tax. This affects real estate investors who develop pre-1936 buildings. It is now only available if the structure is certified as a historic building, where a 20% credit is applied.
- There is a change to 1031 exchanges. Previously… property owners would use what’s called a cost segregation study to identify personal property components to depreciate over a shorter time instead of purchasing a like-kind property. This is no longer the case. Now, only “Real Property” will qualify for a 1031 exchange.
Some changes real estate investors can take advantage of.
- Rental owners whom have LLCs, LLPs, sole proprietorships or owned individually, gain a new tax deduction with this bill. These business, are pass through businesses because the income “passes through” to the owner’s individual tax returns using individual tax rates; under this bill these landlords can now deduct an amount equal to 20% of their net rental income.
This is in addition to all your other rental-related deductions. If you qualify for this deduction, you’re effectively taxed on only 80% of your rental income. Thus, the effective rate for taxpayers in the top 37% tax bracket is 29.5%.[ii]
- Depreciation for assets with less than 20 years of useful life will qualify for a bonus depreciation of 100% during that time period.
Some examples include:
- Land improvements like landscaping and driveways
- Equipments and tools use at the property
- Computers and Software
One important thing to note, is since this is a bonus depreciation it is subject to a recapture tax when you sell the asset. Which means you may have to pay it back someday even if you are not paying tax on it this year.
- A few sources online had misinterpreted a provision regarding self-employment tax for landlords. Originally, it was thought that rental property owners would pay a new 15.3% self employment tax. This is not the case and net rental income is still not subject to self-employment taxes.
- There is no change for itemized deductions for rental property owners. Business can deduct expenses from rental properties. This change to itemized deductions relates to primary and secondary residences. You can view the exact details at com.
- There is also no change for property depreciation. The useful life of residential rental property is 27.5 years. Commercial property has a useful life of 39 years.
- There was no change to the capital gains amounts of selling personal property in Section 121. The amounts stayed the same at $250K for single taxpayers and $500K for married couples filing jointly in which the owner lived there for 2 of the last 5 years.
Big changes for owners of non-residential commercial property owners and short term rentals, and gifting large estates.
- Changes to Section 179 allows you to write off the entire cost of specific property. The aggregate cost amount has gone up from $500k to $1 Million. Non-residential property owners such as commercial property owners or short term rental property like an AirBnb property have a big advantage. Some expenses considered are roofs, HVACs, fire systems, security systems or other big time improvements.
- If you have a large estate, you can now give more as a lifetime gift. The amount has gone from $5M to $10M per person. This doubling relates to the Lifetime Gift Exclusion only. There is a difference between the annual gift about of $14K and the change to the lifetime gift.
- There are other changes that may affect you as in individual but not necessarily a rental property owner most importantly the revised tax brackets.
This what they look like now.
These changes all start as of January 1, 2018 and go until 2025. There may be loopholes that develop as CPAs start their filings and navigating the new law so be sure to ask your tax professional any questions or advice that may improve your situation.
Your property management company should be able to help you with documentation of larger renovations and items which may be tax deductible. Day Property Management is available for questions by any of the property owners they partner with. To start working with Day Property Management contact us by filling out our form at www.daypropertymanagement.com/contact-us or call us at 920-968-0626.