We’ve had some big tax changes in 2018 and some of those changes are going to impact your real estate investment strategies.
We’ll start with the easy stuff.
The 100% bonus depreciation is now available for residential and non-residential real estate (RE) investors. That’s a change in and of itself because up until now real estate investors were not able to use bonus depreciation. Now both residential and non-residential RE investors can.
Plus, it’s effective for property bought after 9/27/17.
Plus, you can buy both new and used property and qualify. You used to be only able to use bonus depreciation on new property.
If the property you buy has a class life of 20 years or less, it is eligible. The IRS publishes a list of property with class lives, that you can use as a reference. For example, the class life for the real property part of the real estate is 27.5 years (residential) or 39 years (non-residential).
Bonus depreciation doesn’t mean that you get extra depreciation. It means you are able to take the deduction all in the current year.
However, just like with any other real estate deduction for your passive investments, make sure you can take the the deduction on your return. Passive losses are only allowed up to $25,000 if you have less than $100,000 in adjusted gross income (AGI). If your AGI is over $150,000, you don’t get any deduction. If your income is between $100,000 and $150,000, the amount you can deduct phases out. The only exception to the higher income phase-out or disallowance is if you or your spouse (if married, filing jointly) is a real estate professional.
There is also a 20% income reduction possible for your pass-through entities. That includes a Schedule E (Form 1040) that you use to report income and expenses for real estate that you hold personally or with a single member LLC. It also includes pass through rental income that may come from a partnership or an S Corporation.
Tomorrow, we’re going to go through how the 20% pass-through income reduction can impact your real estate tax strategies.