Starting 2018 with Taxes in Mind

01/02/2018 07:18 pm ET

Real estate investors didn’t see massive changes with the final tax bill signed into law by President Trump, but they will see enough change to influence real estate property investment decisions starting in 2018.

For a quick overview, definitely calls for a talk with your CPA, of the changes that affect real estate investors, here are the highlights:

  • While there were changes to deductibility of mortgage interest and state/local taxes for personal residences, all mortgage interest, taxes and normal operational expenses for rental properties are intact.
  • HELOC and home equity loan interest deductibility was killed in most cases for personal residences, it is also still intact for rental properties. This even includes interest on home equity loans on a personal residence if the proceeds of the loan are used for the purchase or improvement of a rental property investment.
  • There were no changes in capital gains taxes for rental property sales. Other good news was the fact that, although 1031 Exchanges were eliminated for some investment classes, they remained in effect for real estate.
  • If you’ve been flipping and taking advantage of the DPAD, Domestic Properties Activity Deduction, that one’s over, done away with for real estate in the new law.
  • Bonus depreciation – The new tax law increases bonus depreciation from 50% to 100% for assets with useful lives of less than 20 years. If you buy personal property for your rental, such as carpet, appliances or equipment, you can now immediately write off the entire cost of those assets.
  • Depreciation on the entire property hasn’t changed, with the life remaining 27.5 years for residential rental property.
  • Pass-Through Deduction – This is a big one, but it’s very complicated for some investors. It’s also called the “freebie deduction.” Most investors fit into the pass-through category, as they operate as sole proprietors, S-Corporations or LLCs. Without some other forms of income complications, the simplest application of this is that you can write off 20% of income after expenses from your rental property. There are limitations and rules if you have capital gains or corporate dividend income, but only a CPA can sort those out. Even with those issues, this is a freebie deduction.
  • While many of the mortgage interest and state/local taxation deductions disappeared or were limited for personal homes in the new law, if you convert your personal home to a rental at some point, then all of the rental investment deductions come back into play.

Overall, the real estate investor hasn’t seen any really terrible changes in the new law that cut their profitability. When the do pass through the profits though, they will see changes to the personal tax bracket in which they’ll fall. Here are those:

Here are the brackets for the single taxpayer.

10% — 0 to $9,525

12% — $9,525 to $38,700

22% — $38,700 to $82,500

24% — $82,500 to $157,500

32% — $157,500 to $200,000

35% — $200,000 to $500,000

37% — $500,000 and up

Brackets for married couples filing jointly.

10% — 0 to $19,050

12% —$19,050 to $77,400

22% —$77,400 to $165,000

24% — $165,000 to $315,000

32% — $315,000 to $400,000

35% — $400,000 to $600,000

37% — $600,000 and up

Heads of household file in these brackets.

10% — 0 to $13,600

12% — $13,600 to $51,800

22% — $51,800 to $82,500

24% — $82,500 to $157,500

32% — $157,500 to $200,000

35% — $200,000 to $500,000

37% — $500,000 and up

Now you can call up your CPA to drill down, but these are the highlights for 2018 and the new tax law as they relate to real estate investment.

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