The new Tax Plan will affect Real Estate Investment Strategies mostly for the better.
President Trump signed the revised Tax Plan into law effective for tax year 2018. There has been a lot of speculation up till now about how it will affect real estate investors. I spoke with Jonathan McGuire, CPA from the Real Estate team at Aldrich Advisors to sort out the changes, good & bad.
Tax Plan Summary Highlights
1031 Exchange remains unchanged for real estate investors. The deferral of gain on like-kind exchanges is only allowed with respect to real property that is not held primarily for sale.
Tax Pass Through:
Owners of certain pass-through businesses, S Corps, partnerships, & sole proprietorships, will be allowed to deduct up to 20 percent of qualified business income for tax years beginning after December 31, 2017.
The new tax law requires that in order to qualify for Capital Gains, the investment must be held for more than 3 years, compared to the prior 1 year standard. This could affect your plans if you originally planned to get out after one year.
Equipment purchased to operate & maintain a property can be expensed at 100% of the purchase price up to $1,000,000. This does not include real property; land & buildings.
Changes to Individual Itemized Deductions
Previously, individuals could write off all mortgage interest and local property taxes against income to lower the federal tax obligation. This is no longer the case.
Now, the portion of mortgage interest attributable to the first $750,000 is all that will be allowed. These buyers already are treated differently with jumbo loan rates and terms.
Additionally, deduction for home equity loans has been repealed. This could reduce the pool of investors looking to deploy equity held in their residence.
State & Local taxes
The new tax caps the state and local tax write off to a maximum of $10,000. Unless you live in one of the six states without a state income tax, you will pay between 2.9% (ND) to 13.3 (CA) of your income in state tax. When you add property tax to this, it is not difficult to breach the $10,000 cap.
IE: If you live in Portland, OR where the state tax rate is 9.9% and the Median household income is $58,423, your State Income Tax will be: $5,784. If in addition, you own a median priced home in Portland, $319,400 you can expect to pay roughly 1% of the retail value or $3,194 in property tax.
This may not affect a first time buyer if they are able to purchase a home. However, it may cause potential buyers of larger properties to rethink their purchase.
Any additional reduction in demand for single family homes to be built, will likely push the demand for more lifestyle rental options.
Pass Through Deduction:
Owners of certain passive income businesses will be allowed to deduct 20 percent of passive income. Limitations apply.
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