Changes reflected in final “Tax Cuts and Jobs Act” President Trump signed into effect are positive for the real estate industry. The bill preserved many existing benefits real estate experts worried were on the fence during the drafting stages in the House and Senate. Luckily, the new inclusions will be a boon to real estate professionals.
Corporations were the biggest winners in the Tax Cuts and Jobs Acts, with the tax rate slashed 14 percentage points to 21 percent. Many real estate professionals like agents or brokers work through LLCs, but also form partnerships and S-corps. These will benefit from a reduced corporate tax rate.
Additionally, real estate professionals might be able to take advantage of a 20 percent deduction, depending on their income and business classification. This deduction is limited to non-personal service businesses. Real estate clearly is a personal service, but there’s loophole according to the National Association of Realtors (NAR). Business owners are exempt from the personal service restriction if single filers must have taxable income less than $157,500 and married couples filing jointly must have less than $315,000 taxable income.
For a clearer picture of how the new 2018 deductions benefit real estate agents and brokers, the NAR presented several excellent scenarios. The case studies compare 2017 taxes to 2018 to illustrate potential tax savings.
Other Notable Tax Changes
For real estate professionals owning investment assets, newly purchased real estate assets must be held for a three-year period to qualify for capital gains treatment for carried interest. Assets held less than this time period will not be eligible. The carried interest change mostly impacts compensation for private equity managers.
Private Activity Bonds (PAB) remain in place. These are important for infrastructure projects– one of President Trump’s purported election initiatives–and for constructing affordable housing, crucial in many markets nationwide. These bonds are additionally used in state and local mortgage bond programs. In his infrastructure plan, unveiled this year, President Trump calls for the expansion of PABs.
Investors, property managers, and asset managers can benefit from the expanded qualified real property under section 179 expensing. Improvements to non-residential properties can be qualified for expensing now up to $1 million.
Of course, any changes to tax code merits checking with a certified tax professional about your individual situation. What stipulations impact your income varies from broker to broker and agent to agent.