Real Estate and Taxes Under the Trump Tax Plan

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In yesterday’s (June 15, 2018) blog, we talked about 3 changes for real estate investors from the Trump Tax Plan.

Now, let’s talk about what that really means. For example, let’s look at your real estate pass-through income.

First though, we need to talk a second about the Tangible Property Regulations. This is a very long and complicated set of IRS regulations that have been around since 2014. They were modified to make it a little easier for most of us in 2016.

In this particular case, I’m talking about the ability to expense invoices for labor and material that under $2,500.

Awesome, right? Well, maybe not.

Let’s look at a couple of scenarios.

#1. You have pass-through income from your passive real estate.

If your taxable income is under the income threshold ($315K/$157.5K) and is likely to stay that way, then you don’t need to factor the need for wage limitation into your tax planning. You can expense when invoices are $2500 and below and take the 100% bonus depreciation as long as it doesn’t create a real estate loss you can’t currently use against other income. (Remember the general rule that you don’t want to create a suspended loss. If you can’t use the loss, don’t create the loss.)

#2: You do have pass-through income from your passive income and your income is higher.

If your taxable income is over the income threshold ($315K/$157.5K), would taking some or all of the $2500 invoice expensing provision and/or 100% bonus depreciation get you below the threshold? If so, this may be a useful strategy. That’s especially true if you have other pass-through income entities such as an S Corporation business with income. Changing your real estate income may impact a 20% income reduction on another entity.

If you won’t be able to get below the threshold no matter how much expensing or bonus depreciation you take, you may want to consider not taking any of the expensing deduction. When you are over the income threshold, you need to next rely on the wage limitation. In the case of pass-through income from real estate, the amount of depreciable assets you have has an impact on how much of a reduction you can take. If you choose to expense with the under $2500 per invoice strategy, you will reduce the amount of possible depreciable assets you have. That means you have a lower base and thus a lower wage limitation amount. That means less income reduction.

Got a question about this and other strategies for your real estate investment and the Trump Tax Plan?

Make sure you pick up your copy of “Taxmageddon 2018”. It’s available right here in in a “First Look” format. Get a jump on your tax planning with the straight facts now.

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