The Tax Cuts and Jobs Act: What it Means for Real Estate Investors

The Tax Cuts and Jobs Act: What it Means for Real Estate Investors

The Tax Cuts and Jobs Act (the “Act”) recently passed by the United States Congress is already in effect, and delivering major tax savings to landlords, including both long-term and short-term landlords. Unless otherwise noted below, all relevant provisions took effect on January 1, 2018, so they will affect tax liability going forward, but not in 2017.

Section 199A Pass-Through Deduction

The key provision of the Act for many real estate investors is the new deduction for owners of “pass-thru” businesses. Such owners include most residential landlords, including sole proprietors, LLCs, and partnerships. The Act created a brand new tax deduction in Section 199A of the Internal Revenue Code for taxpayers who earn income through pass-thru entities. If rental activity qualifies as a business for tax purposes, as it often does, the landlord may be able to deduct an amount up to 20% of the landlord’s net rental income. This deduction is in addition to all other relevant deductions. The 199A deduction went into effect January 1, 2018, so it will not affect 2017 taxes.

A limitation to the Section 199A deduction applies if the taxpayer is married with more than $315,000 of taxable income or single with more than $157,500 of taxable income and is phased in for individuals exceeding the threshold amounts over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals).

For those subject to the limitation, the deduction cannot exceed the greater of:

  • 50% of the W-2 wages paid with respect to the qualified trade or business (W-2 wage limit) or,
  • The sum of 25% of wages paid plus 2.5% of the unadjusted basis of all depreciable assets.

In general, the deduction cannot exceed 20% of the excess of the taxpayer’s taxable income over net capital gain.

The IRS has not yet issued guidance on this issue, but many CPAs and tax lawyers believe that the Section 199A deduction will not apply to real estate triple-net lease properties. A triple-net lease (triple-net or NNN) is a lease agreement where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance on the property in addition to base rent, common area maintenance, or utilities.  For purposes of Section 199A, triple net lease properties probably will not be considered a trade or business.

Until the IRS provides further guidance, landlords may want to consider transitioning any triple net lease agreements into other lease structures to take advantage of the QBI deduction under Section 199A. Clark Partington will continue to monitor this area and keep you updated. Readers should seek guidance from a lawyer or CPA as the new Act contains numerous complex issues that could yield substantial additional opportunities for tax savings.

Clark Partington’s Real Estate and Tax groups are equipped to answer questions related to your specific situation. With offices in Pensacola, Destin, Santa Rosa Beach, Tallahassee, and Orange Beach (Alabama), we are a full-service firm serving the Gulf Coast and beyond.  To reach one of Clark Partington’s Real Estate or Tax attorneys, contact Kris Anderson at (251) 225-4122 or kanderson@clarkpartington.com.

 

This publication should not be construed as legal advice.Its applicability is dependent upon specific facts and circumstances and is provided for informational purposes only.  You should not act upon this information without seeking advice from a lawyer licensed in your own state.