How the new tax law affects landlords

How the new tax law affects landlords

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How the new tax law affects landlords
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Old 09-13-2018, 09:00 AM
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Default How the new tax law affects landlords

HOW THE NEW TAX LAW AFFECTS LANDLORDS

The new tax law has some major changes in store for landlords.

The Tax Cuts and Jobs Act (H.R. 1, “TCJA”) has been passed by Congress. Landlords are among the biggest winners under the new law.

The main provisions of the TCJA affecting landlords are discussed below. Except where otherwise noted, all of these provisions take effect on January 1, 2018
For landlords, the most stunningly good provision of the TCJA is a new tax deduction for owners of pass-through businesses. This includes the vast majority of residential landlords who own their rental property as sole proprietors (who individually own their properties), limited liability companies (LLCs), and partnerships. With these entities, any profit earned from the rental activity is “passed through” to the owner or owners’ individual tax returns and they pay tax on it at their individual income tax rates.

The TCJA creates a brand new tax deduction for individuals who earn income through pass-through entities. If your rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct an amount equal to 20% of your net rental income. This is in addition to all your other rental-related deductions. If you qualify for this deduction, you’ll effectively be taxed on only 80% of your rental income.

This complex deduction goes into effect in 2018 and is scheduled to end on January 1, 2026. All the ins and outs of the deduction have yet to be made clear by the IRS; however, it basically works as follows:
Taxable Income Below $315,000 ($157,500 for Singles)

You qualify for an income tax deduction equal to 20% of your rental income if:

• you operate your rental business as a sole proprietor, LLC owner, partner in a partnership, or S corporation shareholder, and
• your total taxable income for the year from all sources after deductions is below $315,000 if you’re married filing jointly, or $157,500 if you’re single.
Example: Assume that a landlord has $20,000 in rental income and their taxable income is $100,000 in 2018. Since she was a sole proprietor, she may take a pass-through income deduction of 20% x $20,000 rental income = $4,000. This saves her $960 in income tax.

This deduction is phased out if your income exceeds the $315,000/$157,500 limits. It disappears entirely for marrieds filing jointly whose income exceeds $415,000 and for singles whose income exceeds $207,500.

This is a personal deduction you can take on your return whether or not you itemize. However, it is not an “above the line” deduction that reduces your adjusted gross income (AGI).

Income Above $415,000 ($207,500 for Singles)
If your annual taxable income is over $415,000 if you’re married filing jointly, or $207,500 if you’re single, you are still entitled to a pass-through deduction of up to 20% of your rental activity income. However, your deduction will be limited
Lower Individual Tax Rates

As mentioned above, almost all residential landlords pay income tax on their rental profits at their individual tax rates. The TCJA reduces these individual rates. Starting 2018, the individual tax rates are as follows:

Rate Married Filing Jointly Individual Return

10% $0 - $19,050 $0 - $9,525
12% $19,050- $77,400 $9,525 - $38,700
22% $77,400 - $165,000 $38,700 - $82,500
24% $165,000 - $315,000 $82,500 - $157,500
32% $315,000 - $400,000 $157,500 - $200,000
35% $400,000 - $600,000 $200,000 - $500,000
37% over $600,000 over $500,000
These rates are scheduled to expire after 2025.

For more information or for a consultation for your 2018 tax return, call
Robert Bloom CPA 425 941 5224

I am a Villages resident and had a 35 year private CPA practice in Seattle. I come to your home to meet with you and discuss your strategic tax planning needs. I am reasonably priced, experienced, very knowledgeable, and easy to work with. I am available to you throughout the year, 7 days a week, for questions that may arise. Now is the time to start looking toward your tax return for 2018, and begin the discussion so that you are well prepared and have done everything possible to have the best outcome. I am taking appointments now for fall planning.

425 941 5224

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income, tax, deduction, rental, landlords

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