Ahh…the new tax bill….Many of you may already know that a new tax reform is on the horizon for the United States. But what does it mean? How will it impact YOU and how will it impact your real estate investing business? Now, couple of things here… I am not a CPA or an attorney so anything that you read here is strictly an opinion article and it should not be taken as an actual tax and/or legal advice. That ALSO being said, I’m going to throw in the original video that my attorney & CPA, Mark Kohler, made to help you understand this bill from the perspective of a business owner! I also have my take and opinion based on the video and my other research!
Couple of things here…
I’m all for the corporate tax cut. U.S. has had one of the highest corporate tax rate for the longest time. This will be great as we may be able to attract larger corporations back in to the U.S. shores where we would increase our tax base, thus increase the tax revenue. However, very few of the real estate investors (even at the highest level) will see a benefit from that cut.
The BIG plus I see is the overall personal tax cuts across the different brackets. It appears that each of the tax brackets were reduced on an average of 2-3% in tax cuts. Most real estate investors invest using pass-through entities such as LLCs and S-Corporations. Because the investors are getting taxed at whatever is passed through after the deductions, this is a HUGE win as our adjustable gross income would be lowered anyhow since we get to take depreciation, business expenses and write-offs.
The bill also includes a repeal of making deductions on mortgage interests and other expenses related to owning a second house. However, this is not the case with us real estate investors. Because we purchase real estate for the purpose of creating revenue, we are allowed to continue writing off mortgage interest, depreciation, property taxes, maintenance, repairs and much more.
The earlier version of the bill DID include an article where rental income would be subject to a tax rate of 15.3% which basically is the self-employment tax. Due to the unpopularity of this change, the 15.3% tax was struck down, leaving the rental income treated the same as it was before.
Keep an eye on the changes with the new bill! My BIG recommendation is to always consult with a licensed, professional and a competent CPA who understands the real estate investing business. If you’re running a real estate investing business, it’s time to graduate from your local small book-keeping and tax preparation shop. Hire someone who can watch your back!