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 USTaxAid.com 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.