2018 Strategies for Your Real Estate Pass-Through Entity

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One of the big changes for your 2018 taxes will be the pass-through income reduction. It’s also one of the most misunderstood.

Let’s start with the basics, as it applies to real estate investments.

If you have real estate that you hold in a pass-through entity, then you may be able to reduce that net income by 20% for tax purposes.. Pass-through entities for real estate would include a Schedule E (property you own personally or hold in a single member LLC), a partnership or an S Corporation. If you hold your real estate in a C Corporation (NOT recommended), it is not a pass-through entity.

The first step is to look at what your taxable income would be assuming no pass through deduction. If you’re married filing jointly and it’s less than $315,000 or you are single and it’s less than $157,500, you are below the income threshold.

This is your TOTAL taxable income that would be reported on your Form 1040. So it’s not just from real estate, or not just from a business, but includes all income that comes from your business and your real estate and your job and capital gains and pension distributions and “other income”, less adjustments to income for things like contributions to your pension plan and then after subtracting either your standard deduction or total itemized deductions.

If it’s less than the income threshold, you’re golden. You qualify to reduce the income from your flow-through entity by 20% for tax purposes. You may have taxable income of $100,000 from your real estate, but you’ll only have to pay tax on $80,000 of it.

The reduction does not work for capital gains, however

If your taxable income is over the income threshold, you can only take a reduction on income up to 50% of W-2 wages paid or 25% of W-2 wages page and 2.5% of your qualifying depreciable assets.

The best way to qualify for  this reduction is to keep your income under the threshold. If your taxable income is above that amount, then now is the time to start strategizing on what you should do next.

Got a question about real estate tax in 2018? Please join us during the next Coaching session. You can find out more at: https://www.ustaxaid.com/coaching-program/

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