by Toby Mathis
Earlier this year, President Donald Trump signed into law H.R.1. – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for the fiscal year 2018, or more commonly known as the tax reform bill. Touted as the biggest tax reform seen in the past 30 years, this Act affects every class of taxpayers and businesses, and most notably, real estate investors.
Read the full H.R. 1 Tax Reform Act on Congress.gov.
Here are three of the many benefits real estate investors can utilize, in general, starting in 2018. As always, consult with your tax professional to see how your individual tax bill may be affected. And, if you would like to optimize your business structure to get the most benefit out of this reform, we’ve listed three ways you can do that at the bottom of this article.
Lower Individual and Corporate Income Tax Rates
The maximum marginal income tax rate will be lowered to 37% from 39.6% for individuals and long-term capital gains for individuals remains steady at 20%.
The corporate tax rate will be lowered to 21% from 35%. Combined with the 20% maximum tax rate on qualified dividends paid to an individual shareholder from a C corporation, the income tax rate for a C corporation’s distributions will be 36.8%.
Deduction for Pass-Through Entities’ Qualified Business Income
Individuals with qualified business income from a pass-through entity will receive up to a 20% additional deduction on that income. Combined with the lower individual income tax, in theory, this could mean a maximum marginal tax rate of 29.6% if you’re eligible for the full deduction. Limitations apply so be sure to confirm that your situation is eligible.
Increased and Expanded Depreciation Deductions
In what’s been called a major victory for landlords, residential rental property owners can now deduct the cost of personal property, such as appliances and furniture, used in rental units. Additionally, receive up to 100% bonus depreciation, phased down yearly until 2026, on both new and used business-use personal property.
A thorough review of your entity structure by a professional team experienced with real estate investing is absolutely critical to ensure you receive the most positive impact from the passage of the tax reform bill. Restructuring early in the new year could improve your tax situation and now is the perfect time to figure out how.