How does the new tax plan affect investors?
The “Tax Cuts and Jobs Act” benefits real estate investors by creating a Qualified Business Income Deduction for Owners of Pass-Through Entities (Sole Proprietors, LLC Members, LLP Partners and Shareholders in S-Corporations). Because of the fact that this income is taxed on the individual tax return of the investor, this new deduction will be deducted on the individual’s personal income tax return. For Single Taxpayers with Taxable Income below $157,500 and for Married Taxpayers filing Jointly with Taxable Income under $315,000, this deduction is 20% of the income from the pass through entities. Once taxable income exceeds these thresholds, there are certain limitations based on the type of business and the wages paid by such business plus a percentage of the businesses tangible depreciable property, i.e. real estate. This addition of a percentage of the tangible depreciable property definitely benefits the real estate investor.
In addition to the creation of the “Qualified Business Income Deduction”, the Tax Cuts and Jobs Act expanded the definition of qualified real property eligible for section 179 expensing to include any of the following improvements made to nonresidential real property placed in service after the date such property was first placed in service: roofs, heating ventilation, air conditioning property, fire protection, systems and security systems.
Last but not least, the changes to the tax law preserved the Section 1031 Like Kind Exchange rules for real property, which allows investors to postpone paying taxes on gains received from the sale of an investment property if they reinvest the proceeds in a similar property as part of a qualifying like kind exchange.