The New Tax Law and Your Real Estate Business

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new tax law

As you probably already know, the 2017 “Tax Cuts and Jobs Act” is now law.  What you may not know is how to implement those tax changes to maximize the profitability of your real estate business.  Below are some highlights of the new law so you can be sure you are taking every advantage of the opportunities presented.

Lower Personal Income tax Rates

The new law lowers the marginal income tax rate for individuals and married filing jointly.  There are a total of 7 brackets, with the lowest starting at 10% for induvial earning up to $9,525 and married filing jointly up to $19,050.  At the higher end, the rate is lowered from 39.6% to 37% for those individuals earning more than $500,000 and married filing jointly earning $600,000.  Also, the standard deduction was increased to $12,000 for single filers and $24,000 for joint filers.

Personal Service Deduction

The bill provides an above the line deduction of 20% for business income earned by sole proprietors, independent contractors, partnerships and limited liability companies.  There are certain conditions to qualify for the deduction.

  • The 20% deduction is only available to businesses that do not provide personal services (i.e. accountants, lawyers and real estate professionals).
  • For those businesses that do provide personal services, the 20% deduction is only available for those with taxable income less than $157,500 (single) or $315,000 (married).

179 Expensing

Generally, a 179 expense allows a business to deduct the full purchase price of certain business capital expenditures made during the tax year.  Examples include computers, office equipment, software, and vehicles.  New in 2018, is the addition of real property along with roofs, fire alarm and security systems, and HVAC systems. The property had to have been “put in service” during the tax year for the expense to be deducted.  For 2018, the limits are:

  • $1 million on qualified capital expenditures. The deduction phases out at $2.5 million.
  • $10,000 for automobiles in the first year the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth year.

Retirement Contributions

Just because you’re self-employed doesn’t mean that you can’t save for retirement.  The new tax law will have a minimal impact on how people save for retirement. There are a number of retirement plan options, that potentially allow you to defer taxes on income while also saving for your retirement.   In some instances, you can even make contributions to your plan next year for this tax year.

One big change is a prohibition on converting a Roth IRA back to a Traditional IRA.  Contributions to a Roth IRA are not deductible but when funds are withdrawn, the proceeds (and gains) are not taxable.  The Traditional IRA is the opposite, contributions are deductible but withdrawn funds (and gains) are taxable.  Because of the benefit of future tax savings, investors may choose to convert their Traditional IRA to a Roth IRA, and if the market didn’t perform as expected, convert the IRA back.  Under the new tax law, once converted, it cannot be changed back.  Because of the lower tax brackets and rates, you may consider investing that additional income in a retirement plan.  Place a quick call to your financial advisor or CPA to discuss how best to maximize your savings for retirement.

Entertainment

The law eliminates deductions for any entertainment, recreation or social activities, even if they are connected with the business.  Membership fees and dues are also excluded as deductions.  For example, if you offer tickets to concerts, sporting events or theme parks to clients, the cost of those tickets are no longer deductible.  Also excluded are costs associated with renting meeting spaces or venues for business events.  The new law does keep the 50% deduction for business meals.

Now I’m going to throw in the proverbial caveat … I’m not a CPA so of course, please consult with your personal accountant on your specific tax situation.  Understanding your personal tax situation will best help you to navigate the tips above and possibly maximize the amount of income you get to keep.