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How the Final GOP Tax Bill Will Affect Real Estate Investors

via https://www.biggerpockets.com/blog/final-gop-tax-plan



In a matter of seven weeks, the GOP has developed, amended, and reconciled a $1.456 trillion tax bill. On December 22, Donald Trump tweeted the tax bill into law.

If it feels like this all happened fast, it’s because it did. The Tax Reform Act of 1986, our country’s last major tax overhaul, took a little under two years to pass from start to finish.


This legislative history was promised to be aimed at the middle class. While I’m not going to dive into whether or not that promise was fulfilled, I can tell you this: real estate investors are major winners.


This article is not meant to be all encompassing. I have pulled out changes that I feel will impact the majority of BiggerPockets readers. So even though alimony rules have changed, this is the last time I’ll be mentioning it.


Make sure you bookmark this BiggerPockets Q&A thread where the bill is being discussed and strategies are being crafted.


Almost all of these changes begin on January 1, 2018, and revert in 2025.


What’s Changed

Tax Brackets

  • 10% Tax Bracket

  • MFJ: $0 – $19,050

  • Single: $0 – $9,525

  • 12% Tax Bracket

  • MFJ: $19,051 – $77,400

  • Single: $9,526 – $38,700

  • 22% Tax Bracket

  • MFJ: $77,401 – $165,000

  • Single: $38,701 – $82,500

  • 24% Tax Bracket

  • MFJ: $165,001 – $315,000

  • Single: $82,501 – $157,500

  • 32% Tax Bracket

  • MFJ: $315,001 – $400,000

  • Single: $157,501 – $200,000

  • 35% Tax Bracket

  • MFJ: $400,001 – $600,000

  • Single: $200,001 – $500,000

  • 37% Tax Bracket

  • MFJ: $600,000+

  • Single: $500,000+


Related: Key Changes in the Trump Tax Plan That Will Affect Real Estate Investors


Itemized Deductions

Mortgage interest is now only deductible on the first $750,000 of acquisition debt on primary and secondary residences. There is a grandfather clause that allows all previously purchased residences to continue deducting their interest on up to $1,000,000 of debt.


Interest on home equity debt is no longer deductible, unless the proceeds are used in a trade or business acquisition or to improve rentals. Home equity debt includes refinances on your primary or secondary residences as well as HELOCs.


State and local taxes are now limited to an aggregate $10,000 deduction. This includes state income and property taxes. Folks living in high-income, high-property-tax states, like California, New Jersey, and New York, will be negatively affected. If your state income tax is $12,000 and your state property tax is $8,000, you only get a maximum deduction of $10,000, even though your state and local taxes amount to $20,000 total.

Miscellaneous itemized deductions have been eliminated. This means that you can no longer deduct unreimbursed employee expenses and tax preparation fees (that are not allocated to prepping schedule C and E.


Medical expenses will be easier to claim as the 10% floor has been reduced to 7.5% of AGI. So if your AGI is $100,000, previously you had to incur at least $10,000 of medical expenses before they became deductible. Now you only have to incur $7,500.

Note: these deductions do not limit ability to claim expenses on rental property. These changes are related to your itemized deductions (Schedule A).


Standard Deduction and Personal Exemptions

The standard deduction will now be $12,000 for those filing single, and $24,000 for those who are married and filing joint. Personal exemptions have been eliminated.

Previously, a family of five would get a standard deduction of $12,700, and total personal exemptions of $20,250. Combined, this family received a total deduction of $32,950. Now their total deduction is only $24,000.


Child Tax Credit

To avoid mutiny from the above family of five above, the GOP has made changes to the child tax credit. The credit will increase from $1,000 to $2,000 per qualifying child. The refundable credit will increase to $1,400.


The income phase outs have increased to $200,000 if single and $400,000 if married filing joint.


529 Plans

If you’ve read my prior articles, you likely know my stance on 529 plans. With the passing of this bill, I dislike them a little less.


You can now use 529 plans to pay for private, public, and religious elementary and secondary schools, plus qualified education expenses.


Alternative Minimum Tax (AMT)

Unfortunately for high-income earners and their tax preparers, the AMT is still in existence. The good news is that the exemption amounts have increased to $109,400 for married filing joint and $70,300 for all other taxpayers. Additionally, the phaseout thresholds are increased to $1,000,000 for married taxpayers filing a joint return, and $500,000 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation.


Obamacare Penalty Eliminated

The penalty for not having health care has been eliminated beginning in 2019. Healthy millennials who don’t want/need health insurance are high-fiving. Their parents are upset that their premiums will likely increase in 2019.


Pass-Through Deduction

A new “freebie” deduction has been granted to sole proprietors, LLCs, and S corps generating qualified business income. If you are a partner in a business, you will receive the deduction based on your allocable ownership.

The deduction appears to be on an aggregated basis for rental properties but on a business-by-business basis for businesses.

The deduction is the the sum of:

  • The lesser of:

  • Combined Qualified Business Income, or

  • 20% of the excess of: the taxable income divided by the sum of any net capital gain

  • And the lesser of:

  • 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer, or

  • taxable income reduced by the net capital gain

In order to figure the above, we must know what combined qualified business income is.


Combined qualified business income is the lesser of:

  • 20% of the qualified business income with respect to the qualified trade or business; or

  • The greater of:

  • 50% of the W-2 wages with respect to the qualified trade or business, or

  • The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property

Let’s assume that you don’t have any capital gain or qualified cooperative dividends. We’ll also assume you own a rental property you purchased for $120,000, of which $100,000 was allocated to the building and $20,000 was allocated to the land. Furthermore, let’s assume that your rental property generated $5,000 in net taxable income after deprecation and amortization.


Your deduction calculation will be the lesser of:

  • 20% of the qualified business income ($1,000; figured by multiplying $5,000 by 20%); or

  • The greater of:

  • 50% of the W-2 wages ($0; you didn’t pay yourself W-2 wages); or

  • The sum of 25% of the W-2 wages ($0) plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property ($2,500; figured by multiplying the unadjusted (unadjusted basis does not include land) basis of $100,000 by 2.5%).

In this example, your deduction will be the lesser of $1,000 or $2,500, so your deduction is $1,000.


This is a freebie deduction. All you have to do in order to claim it is make more money. It’s a deduction that’s figured after the calculation of your AGI though, so it’s being referred to as a “below the line” deduction.