Putting Together the New Pass-through Income Deduction and Real Estate Professional Status

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There is a lot of tax change coming. That’s the biggest understatement I’ve made in a long time. The new Tax Cuts and Jobs Act is in force, generally, for 2018. There are a few things that started early (like the 100% bonus depreciation which started for purchases from 9/27/17) and some that will start late (like alimony that begins after 1/1/19 will no longer be deductible). But, for the most part it starts effective with the 2018 tax year.

I received the following question at USTaxAid.com. If you have a tax question, there are a number of ways you can get an answer. You could become a client, get a consultation or coaching. If you want a general, free answer, you can send it in through the website link. You can read more about that all at: https://www.ustaxaid.com/tax-question/

Here is the question

“In regard to the new law for 2018 for pass-through threshold income deductions, can I set up a C-Corp or S Corp before April 15th as an independent contractor (Realtor &investor), to apply on my 2017 income taxes? I’m sure I pass the “REP” rules as a realtor in terms of hours spent in this activity, but not sure exactly how this works? We really need that 20% deduction to be applied to our taxes even though I didn’t make more than $50,000 in 2017. What are my options?”

There is a lot contained in the question. Let’s unpack it.

The new tax law, including the possible 20% pass-through income reduction is effective for your 2018 tax return. It is not applicable for your 2017 return. You can’t take a pass-through income reduction in 2017.

Can you set up a C Corporation and S Corporation in 2018 and make it retroactive to 2017? No. You need to set it up in the year in which you want it to be effective. Until it’s set up, you can’ t use it.

Regarding the Real Estate Professional (REP) test, there are 3 tests required that you need to pass. However, if your adjusted gross income is less than $100,000, you will receive up to $25,000 in real estate loss without the REP status. It doesn’t seem like you need it.

There were some fairly complicated issues in that short question. Keep reading the blogs to learn more about law changes. You may want to consider joining a coaching session so you can get more education about the new tax law, how and when to use an S Corporation or a C Corporation and how to legally use the real estate professional status.

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