Although the Trump tax plan, known as the “Tax Cuts and Jobs Act,” was promoted as a tax cut for the middle class, the major benefits go to corporations, entrepreneurs and real estate investors.
And most noteworthy are these top seven positive changes for real estate investors.
1. 20% pass-through deduction
This new 20 percent pass-through deduction originally was proposed to keep small businesses at the same or lower rate than corporations. At the last minute, it created benefits for real estate investors.
And here’s how it works:
Generally, business owners and real estate investors receive a 20 percent deduction of their net income after depreciation and amortization. Amortization is taxable income from the business of investing.
And the deduction cannot be more than the higher of two things:
- 50 percent of W-2 wages paid to employees of the company
- 25 percent of W-2 wages paid to employees of the company plus 2.5 percent of the original cost of buildings and equipment
Because many real estate investors do not pay any W-2 wages, the deduction normally will be limited to 2.5 percent of the original cost of the building and equipment.
2. Bonus depreciation for roofs, HVAC, alarm systems and leasehold improvements
Under the old law, roofs, HVAC and alarm systems depreciated as if they were part of the building. And this meant depreciation over 39 years for commercial property and 27.5 years for residential rental property.
Under the new tax plan, new bonus depreciation rules make them deductible.
For example, instead of deducting a new roof through normal depreciation, 100 percent of the cost is deductible in the year added.
3. Bonus depreciation for used property
In the past, bonus depreciation only applied to brand new property. So while a cost segregation could mean faster depreciation, bonus depreciation was not allowed.
With the Trump Tax Plan, bonus depreciation applies to both new and used property. As a result, a cost segregation will not just result in moving depreciation from 27.5 or 39 years to five to 15 years.
Much of the property can be written off completely in the year acquired. And this change applies even if the property is used. And remember, unlike Section 179 deductions, there is no income limitation on bonus depreciation.
4. New applicability of Section 179 to residential real estate
Previously, the Section 179 deduction for personal property and certain improvements wasn’t available to residential rental property.
In comparison, Section 179 now applies to both nonresidential and residential rental property. Although this change won’t matter with bonus depreciation in effect, Section 179 is permanent.
So when the bonus depreciation rules start phasing out in 2023, residential rental investors can still take a deduction for new and used property to the extent of their net income.
And this change applies to property that isn’t already expensed under the tangible personal property rules.
5. Increased deductions for automobiles used in business or investment
In addition, depreciation deduction for business automobiles is increasing. Under the new law, the depreciation deduction for business automobiles, other than SUVs and trucks over 6,000 pounds, goes up.
And there is still the bonus depreciation of $8,000 that now applies to both new and used vehicles. This change includes business owners and professional real estate investors in the year purchased.
|Year||Old automobile depreciation deduction||New automobile depreciation deduction|
|4||$1,875 for every year after||$5,760 for every year after|
6. $12,000 exemption for wages paid to children
In the past, a child could be paid up to $6,350 without paying tax. Under the Trump Tax Plan, a child can be paid up to $12,000 without paying tax. This change creates a terrific incentive for parents hire their children.
And combine this change with no Social Security taxes for children under the age of 18 if paid by a sole proprietorship (Schedule C or Schedule E on a 1040) or partnership owned solely by the child’s parent(s).
So parents can give their child a job at work or real estate investments.
7. Increased estate tax exemption from $5M to $10M and from $10M to $20M
Previously, an individual was exempt from estate tax for the first $5.49 million of assets held at his or her death. A married couple received twice that exemption, or almost $11 million.
With the new plan, estate tax exemption double to almost $11 million for an individual and almost $22 million for a married couple. And few real estate investors understand the significance of this increase for income tax purposes.
Basis step up provision
In addition, when a person dies, the gain inherent in their assets will disappear. And this is called the basis step up provision.
With the estate tax intact, the basis step up remains. And combined with the retention of the like-kind exchange provisions for real estate, this change means two things:
- Real estate investors can avoid all taxes on cash flow through cost segregations and bonus depreciation.
- Investors can forever eliminate tax on capital gains.
As a result, investors can do a 1031 like-kind exchange whenever they are ready to sell a property, and then hold the real estate until they die. And if they want to pull cash out of their properties, they can borrow it through refinancing or through lines of credit.
With the proper planning, real estate investors can receive amazing tax benefits from the Tax Cuts and Jobs Act.