Beware of this Real Estate Tax Strategy with the Trump Tax Plan! | USTaxAid

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Beware of this Real Estate Tax Strategy with the Trump Tax Plan!

Written by Diane Kennedy, CPA on June 23, 2018

Real estate investors know this trick. If you have an expense with your real estate rental that may be repair or may be a capital improvement, you have two possibilities. It may be a current deduction and you expense the whole thing or it could be an improvement that you capitalize and then depreciate over time. The trade off is a deduction now or much smaller deductions over the following years.

Which is best? Sometimes you don’t have a choice. The Tangible Property Regulations, put in place in 2014, made it clear that under certain circumstances  you must capitalize. It turns out that the overly complicated regulations meant a lot of paperwork and frequently lost repair deductions. In 2016, that was changed to allow you to take a write-off for repairs if the individual invoice was less than $2,500.

Now, we’re talking! As long as you keep your invoices under $2,500, your repair/improvement is a deduction.

Not so fast.

The next thing to figure out is how much will be deductible. If your expenses create a paper loss, it may not be currently deductible and then you have a suspended loss. That’s a wasted opportunity. It’s hard to “unsuspend” a suspended loss. (It’s possible, just hard.)

If your adjusted gross income (AGI) is under $100,000, you can write off up to $25,000 per year in real estate losses. If your AGI is over $150,000 you can’t write off any losses. The exception is if you or your spouse (if married, filing jointly) can claim real estate professional status. Between $100K – $150K, the amount you can deduct phases out.

Now, thanks to the Trump Tax Plan, we have another issue. And it’s even more complicated.

If you have real estate passive income and your taxable income is under $315K (married, filing jointly) and $157.5K (single), you can take a pass-through income reduction of 20%. If your taxable income is over that, then you have another test to pas. It’s called the wage limitation. Your income reduction will be limited by 50% of W-2 wages paid by the real estate investment or 25% of W-2 wages paid + 2.5% of depreciable property.

Finally, we’re at the issue. If your income is above the income limitation ($315K/$157.5K), you will need to look at the wage limitation. Most real estate investments don’t pay W-2 wages, so you need to look at how much depreciable property you have.

If you take the <$2500 write-off, you’re going to lose some depreciable property. Instead, you can take the new 100% bonus depreciation. You still have the depreciable property PLUS you can take advantage of full write-off in this year.

There are a lot of choices that have been made available with the Trump Tax Plan. Does your tax plan need a refresh?

“Taxmageddon 2018” talks about the new strategies and actions you should take before year end. And, of course, keep watch here for new strategies and insights we have about this and other tax laws.

A new blog post at 3 days a week.

We truly have Taxmageddon now. It’s the end of the old way of calculating taxes and the beginning of new strategies for those who are willing to take action.


  1. Scott C says:

    I think there is yet another element to add to the complexity of the tax strategy you discussed in this post…

    If you write something off as an expense , then when you sell the property… you do not have to “add back” or recapture the depreciated amount.

    If a RE owner took bonus depreciation, those amounts would be subject to the recapture of the depreciation taken.

    I think that might tip the scales back towards just writing off the expenses and not have to worry about the recapture tax. Even if there are suspended losses… when a property is sold, you would get the deductions then, instead of the recapture tax if something was depreciated.

    Thanks for a great site!


  2. Diane Kennedy says:

    Thanks for the comments, Scott.

    This is how I would assess the expense vs capitalization/depreciation question. I’m going to assume some things that aren’t reasonable in the real world, but just for the sake of simplification.

    Let’s say you buy a property for $100,000 and do $10,000 in repairs/improvements. the $10K is on 5 separate invoices, 4 for $2450 and 1 for $200.

    If you expense them, your basis is $100K and we’ll assume no accumulated depreciation on that.

    If you capitalize them, your basis is $110K with $10K of bonus depreciation.

    Now sell it for $150K:

    You have gain of $50,000 in the first case. L-T capital gains rate of maximum of 20% apply (assuming it otherwise qualifies)

    You have gain for $40,000 + $10,000 of recapture. $40K at L-T capital gains and $10K at depreciation recapture of 25%. So you’re trading L-T capital gains for depreciation recapture.

    Question is whether the 20% pass-through reduction made up for it?

    LOL None of this is simple, because then we have to go through the whole Section 199A – pass-through reduction – model and see if it’s applicable.

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