The recently enacted Tax Cuts and Jobs Act (TCJA) brought with it major changes to the real estate industry, an entity that hasn’t seen such a regulatory shake-up since the Tax Reform Act, which was put into practice in the late 1980s.
While wrapping your head around the changes might take a few minutes, the overall shift for the sector is positive. Still, it’s important to understand and learn as much as possible about the new regulations before moving forward. Let’s take a look at a few ways the TCJA may affect real estate professionals and entrepreneurs in 2018 and beyond.
Changes to Pass-Through Entity Taxation
The TCJA lowered the corporate tax rate by 40% to its current standard of 21%. While that might affect you if you work for a real estate corporation, many professionals in this sphere operate as a sole proprietorship or within a pass-through entity. If it’s the latter, you might work in a partnership, LLC, or even as an S corporation. If this applies to you, there will be changes to the way you’re taxed under the new TCJA.
If your business qualifies, you could be eligible for a deduction of up to 20% of your business income. Or, you could deduct 50% of your W-2 wages, or 25% of your W-2 wages plus 2.5% of the unadjusted basis of any depreciated property that qualifies (whichever is greater). While this provision has yet to be ironed out in full, it does appear that brick-and-mortar real estate businesses will benefit overall from its new direction. If you opt to do your own taxes, you may even find that the process for doing so is simpler based on these new regulations.
Adjustments to Depreciation Rates
Under the TCJA, depreciation rates (which were already favorable) are even more so. Now, even used property, which was formerly excluded from the property provision, can qualify for 100% bonus depreciation.
Which assets remain eligible overall hasn’t changed. You’ll still need to be working with a property that is 20 years or younger. While the bonus depreciation standard will begin to dwindle slightly beginning in year 2023 (with rates dropping from 20% year over year until final dissolution in 2027), now still remains a viable time to cash in.
If you’re looking to expense an asset for a commercial property, TCJA also makes it easier to do so. While the former cost limitation was $500,000, it is now raised to $1 million, making it possible for real estate professionals to make improvements and upgrades to their facilities. From roofs to alarm systems, there are myriad components that qualify, and qualifying assets will be phased out beginning at $2.5 million.
New Interest Expense Deduction Laws
Whether your real estate company makes or loses money, you’re taxed accordingly. For instance, if you’re operating a real estate entity that is debt-financed (which many professionals are), if you’ve made an average of more than $25 million in gross revenue over the past three years, you may be limited in your interest expense deductions, including up to 30% of your adjusted taxable income.
You may be able to opt-out of this rule and apply the full interest deduction, but understand that doing so may come with some negatives. Moreover, if you’re operating under a tax loss, not gain, you’ll be limited in your freedom under the loss limitation rules. Now limited to $500,000 for joint filers and just $250,000 for single owners, this money can be designated to protect non-industry related income, such as wages.
To make sure you understand fully how these new tax regulations will affect you and your real estate business, be sure to talk to a tax expert. He or she is well-versed in the latest standards and rules and will be able to walk you through the changes to expect moving forward. That way, when next year’s filing season approaches, you’ll be ready to act.
