Now that the 2018 tax legislation has taken effect, do you know if you are a winner or loser?
Well, despite the elimination of numerous deductions, if you’re a landlord, you’re likely to be a winner – a big winner. Many of the provisions in the new legislation are favorable to investors but really favorable to landlords. Below is a summary of 10 tax deductions to consider when filing your 2017 taxes.
(Note: The following suggestions are not meant to be interpreted as legal or investment advice. Please check with your professional tax advisor to get advice pertaining to your individual situation.)
1. Mortgage interest
Mortgage interest, one of the most important deductions, escaped the cutting board for investors. Although the new legislation limits the deduction to the first $750,000 of debt, it does not pertain to properties that generate rental income. If you have a loan on an investment property, there is no limit to the amount of interest expense that you can deduct.1
2. Depreciation
Depreciation, another important deduction, also escaped the knife. This deduction remains the same, meaning investors can continue to depreciate residential properties for 27.5 years.2
3. Property and state income tax
Although property and state income tax deductions will be capped at $10,000 for homeowners, the new law does not affect landlords. Property and state income tax on rental property are deducted on Schedule E, so in other words, they are considered a business expense.3
4. Repairs and property management
Since rental property is considered a business, the expenses necessary to rent and maintain the property are tax deductible. Repairs do need to be deemed “necessary and reasonable,” so, as long as they meet that criteria, they are deductible. The new law doesn’t change these rules.4
5. Travel expenses
This deduction is also unchanged in the new legislation. That means if you live within driving distance of your rentals, mileage counts as a deduction so be sure to keep track of your mileage. However, if your rentals are long distance, keep receipts of your airfare, hotel stays and rental cars, as they are all potential write-offs.5
6. Tax preparation fees
Here’s another example of where landlords are winners. Tax preparation fees are no longer allowed as an itemized deduction for individuals. But they are allowed to be deducted against rental income on a landlord’s Schedule E form.6
7. The 1031 exchange
The 1031 exchange is a highly-prized provision of the tax code. It allows investors to sell one property and buy another of equal or greater value without paying capital gains tax. Luckily, this rule stays in effect for real estate, although it’s being repealed for many other business assets.7
8. Capital gains tax
Capital gains taxes will remain the same under the new tax code. So, it’s a good idea to hold property for at least one year to avoid short-term capital gains, which are taxed at a higher rate.8
9. C Corp
If you are an investor who owns rental property, you may want to operate your business as a C Corporation. The new law lowers the tax rate on C Corps to 21% but there may be a downside related to double taxation. C Corps are taxed when they earn profits and then, taxed again when the profits are distributed to shareholders as dividends. In some instances, however, it may still be beneficial to operate as a C Corp, so be sure to check with your tax adviser to see if it’s financially worthwhile to change the structure of your company.9
10. Pass-through provision
The new law allows for a 20% deduction on certain income earned through an LLC, S Corp, partnership, sole proprietorship and Schedule E form. The Schedule E is used for rental property. However, the deduction depends on your income. If a single taxpayer’s income is above $207,000 or a couple’s income is above $415,000, the deduction will not apply. Please check with your tax advisor to see if the deduction applies to you.10
So will 2018 be a good year to invest in real estate? The short answer is yes, and if you’re planning to buy rental property, the new tax law could be a boon to your investment strategy.
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