If you’re a landlord or are considering becoming one, you may be wondering how the new tax plan affects your investments. Well – we have good news for you. Many real estate investors are on track to benefit from the plan and save money. Here’s the lowdown on how it may affect you.
Pass-through tax deduction
Due to a provision added late to the tax plan, real estate investors with pass-through entities will get a 20 percent deduction on their taxable income. A pass-through is a specific type of corporate structure that allows investors to avoid paying both individual and corporate taxes. With these arrangements, only the individuals pay taxes. Most landlords of residential buildings are sole proprietors, partnerships, real estate investment trusts, S corporations or limited liability companies (LLCs), and usually do business through pass-through entities. In essence, this means that whatever profit is made from the rental building is passed through to the individual, who then pays the taxes at their individual rates.
Only 80 percent of income taxed
This tax plan gives a new deduction to those who profit through these pass-through entities. Do you operate your rentals as a business? If you do, then you will likely be eligible for a 20 percent deduction of the net income from your rentals. As a result, only 80 percent of your business income will be taxed. Investors will be taxed 29.6 percent, instead of the 37 percent from previous years. This difference could add up to substantial savings.
The deduction is scheduled to expire on January 1, 2026.
No changes to self-employment taxes
Although it was originally included in the House bill, rental income will not be included in self-employment taxes. Landlords will not be paying the 15.3 percent hike in taxes on net income from rentals.
Rehab tax eliminated
If you’re a real estate investor who has purchased and is rehabilitating an older building, you will no longer get a 10 percent credit for buildings constructed before 1936. However, if the building is certified historic, you will receive a 20 percent credit.
No change for itemized deductions
Are you concerned that you’ll no longer be able to itemize your deductions? Don’t worry – if you own rental property, you will still be able to deduct any business expenses from those properties.
No change to property depreciation
Even though there was a proposal to reduce the useful life of residential units, there is ultimately no change. The useful life of residential rental property is still 27.5 years.
Speak with your advisor
Because of the complexities associated with the new tax plan, it’s important to make sure you speak with your advisor if you think the changes will affect you. While you are determining what will change and what will be the same, you should also discuss your short- and long-term goals.
If you’d like more information about becoming a landlord in New York City, please click here or call 646-681-5272 to speak with an agent from Platinum Properties. Our team is here to guide you through the real estate process and would be happy to answer all of your questions.