Show me the "20% deduction"!
The good news for income-oriented real estate investors is that many of us will see a large reduction in taxes in 2018. 20% of all real estate income that comes through pass-through entities (LLCs, S Corp.'s, etc.) will be deductible. This will boost returns for many income-based real estate crowdfunding and syndication investments (core/core plus strategies and real estate debt), as well as REITs.
Note that this only applies to income and not to capital gains. So value-added and opportunistic strategies which depend mostly or all on price appreciation are out of luck and will see less or almost no tax sheltering.
Also, if you make too much money (more than $207,500 single or $315,000 MFJ), the deduction may be limited. (More information on those fairly complicated limitations are here.)
So in 2018, you may wish to prioritize more favorable income-producing strategies, if you've been putting them off. (Information on the top core/core plus funds and top hard money loan options are here).
And the same for your REIT allocation as well (as described in this Wall Street Journal article).
And the same for your REIT allocation as well (as described in this Wall Street Journal article).
Also, if you own real estate directly and have been holding it in your own name rather than a pass-through entity, now is the time to talk to your attorney about a change. This will not only protect you from liability, but also take advantage of this new deduction.
Get it back to me faster!
Also positive news for almost all real estate investors are the more favorable rules for expensing when acquiring new properties. This will allow investments to recover costs quicker, which gets investors money back faster than before. This is unlikely to make a very large or noticeable difference on many investments, but it still will be a welcome small net positive.
- Bonus depreciation: Can expense certain business assets (with recovery period less than 20 years) 100% instead of 50%. Note that depreciation has to be paid back to the IRS when you sell a property. So this will have less effect for short-term investments, and more effect on longer-term buy-and-holds.
- Can now expense up to $1 million instead of $500,000.
- Expenses now allowed for roofs, heating, ventilation, air conditioning, fire protection alarm systems, security systems.
That's the good news for all. Now the bad and mixed news…
The Homeowner Triple Whammy
Owning a home in many high tax markets will get much more expensiveand become unaffordable for some.
The doubling of the standard deduction will mean that many people will not be getting a tax break for their mortgage like they do now. Then the capping of the state and local tax deductions to just $10,000, means everyone will have to pay significantly more in taxes to own a home instead of rent. And the elimination of the ability to deduct property taxes will make this even worse.
Together, these 3 things will cause significant lowered demand, net selling of residential properties in these areas and home prices to fall. This will negatively affect investors who own properties in these areas that depend on growing price appreciation.
On the positive side, multifamily investors in these areas should see increased demand as more people are forced to rent. This will decrease vacancies and perhaps allow rents to be raised higher than they would have been before. Also, the price drops could provide an opportunity for income-based residential property investors to pick up rental properties at a lower price.
(Update: December 28, 2017. Some financial advisors (and the financial press) have been recommending that homeowners in high tax states prepay future property taxes in 2017 to get an extra deduction (since the since removal of the deduction doesn't occur until the first day of 2018).
However, the IRS has posted additional guidance clarifying that this will not work for most people. You cannot get a deduction if the taxes have not yet been assessed. And no jurisdictions have assessed them yet. Simply guessing at the amount in the future will not get you a deduction. More information here.)
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