New Tax Act Causes Changes in Depreciation Strategies

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One of the biggest changes with the new Tax Act is the way that pass-through entities are taxed. There is a 20% tax reduction under certain circumstances. Since real estate investments almost always are held in some kind of pass-through structure, this is definitely an important element in your new tax strategy.

First, if your taxable income is under $315,000 (married, filing jointly) or $157,500 (single), you can skip the next part. Your net flow-through income will get the 20% tax reduction.

If your income is over the threshold, then you still may qualify for the reduction. The amount of net income that is subject to it is limitation is the greater of 50% of W-2 wages paid or 25% of W-2 wages paid + 2.5% of qualified depreciable assets. The qualified depreciable assets are assets that are still being depreciated.

Now you see the problem with immediately expensing or depreciating assets. It’s a trade-off between getting the reduction now and in the future or immediately expensing or depreciating the asset to reduce your current income.

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