Effective 2018, we got a brand-new set of tax laws. It changed a lot of things and most importantly, made a lot of tried and true tax strategies just plain tired.
In fact, if you haven’t updated your business and/or real estate tax strategies since 2017, chances are you’re going to pay too much in taxes.
At the end of this blog, I want to clarify something I said during this past Sunday’s pop-up call. Richard, my husband, asked me a follow-up question that I wish I had gotten on the tape.
The answer to his question is important.
First a little background…
There was a lot of confusion about the new tax laws. The IRS chose to focus first on the 20% income deduction for pass-through entities.
What qualified as pass-through?
What type of income qualifies as Qualified Business Income (QBI), an important part of the calculation?
What are “wages” for purposes of the calculations?
What is UBIA (unadjusted basis immediately upon acquisition) for real estate for purposes of the calculation?
And then, what happens if….. hundreds of comments followed with specific examples that didn’t fit the box.
We got “temporary regs” on the 20% income deduction aka Section 199A. That was in August 2018. Then a little over a week ago, we got final regs in January 2019. Retroactive to January 1st 2018.
There were major changes.
For your 2018 return, you can elect whether to follow 2018 or 2019 tax regs. Make no mistake. There are big differences and you want to choose carefully. It’s all or nothing. You can’t pick or choose some from the 2018 regs and others from the 2019 version.
That’s the background. On Sunday, January 27, 2019, I did a “Pop-Up” call for my coaching clients. We had dozens of people on the call and I took one clarification question regarding triple net leases and the 20% income deduction. (You can’t take it, no matter what, if you have a triple net lease.)
Not only that, but you have some things you MUST do for 2018 tax returns if you have real estate, no matter which set of law you choose.
One of those things is that you MUST issue 1099s for your rental properties if you paid anyone more than $600 who was not an employee and did not operate through a corporation.
And effective with the 2019 rules, which you may elect out of for 2018, but are mandatory for 2019, you have something called “real estate enterprise groups.”
Each real estate group must:
Have individual separate books and records for each property,
Have 250 hour of qualifying real estate activities (and a brand-new list of what that means for the 20% income deduction) and
Outside proof and journal of hours worked, who did the work, what they did and on what day for every real estate activity. Hours that your landscaper worked, for example, would be applicable toward the 250-hour requirement. However, you have to have an exact detailed list of who, what, when and how long for each minute you claim.
Even if you elect the 2019 regs, you do NOT need to keep the contemporaneous journal in 2018. Starting in 2019, everyone needs to keep those logs.
That was my husband’s question. If you elect the 2019 regulations (because they are more favorable for service businesses), do you have to keep the real estate log for 2018 and the answer is “no.”
One more gotcha added for real estate in the 2019 regulations – if a C Corporation pays the rent for a self-rental, the income will not be eligible for the 20% income deduction.
My suggestion is that you go back and listen to Sunday’s Pop-up call and then re-read the above. It will make more sense then, I think. And of course, bring your questions to the first Wednesday coaching class. The Real Estate Home Study Course in February will be on Cost Segregation Studies. This includes the template and “how to” do your own. I’m going to talk about WHY those just become even more important with the Trump Tax Plan and also cover the new 2019 regulations in more detail.
The focus for the next 3 months or so of coaching class will be on updating both business and real estate strategies in light of these massive new changes.
If you’ve got a question for Coaching, you can wait to ask during the session or send me an email at Coaching@USTaxAid.com.
To listen to the Pop-Up call from this last Sunday, please go to your coaching page.
If you’re not yet a member of coaching, I strongly urge you and/or your tax professional to join at https://www.ustaxaid.com/coaching-program/.
Got a question about our services or coaching? Contact Us.
P.S. The Pop-Up call recording from Sunday has more highlights of the 2019 final regulations. Please do NOT file or make a decision on whether to follow 2018 or 2019 until you’re comfortable that you know the ramifications of the one you choose.
Until then, extend your returns.