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How the New Tax Cut Affects Real Estate Investors

by | Aug 29, 2018 | Business News

 If you own real estate investment property, you are probably in doubt whether you qualify for a deduction under the Tax Cuts and Jobs Act of 2017 (Sec. 199A). The Act does not specify whether a property investor is entitled to this deduction. Thus, there are uncertainties concerning who qualifies. Some tax return preparers believe most investors can take this deduction while others think most are not eligible. Based on completing over 260,000 tax returns and our thorough understanding of the IRS tax code, we conclude that large real estate investors, such as developers, can take this deduction while most small investors cannot. In general, Sec 199A enables taxpayers to add a tax deduction to their return equal to 20 percent of their qualified business income. The question is what is “qualified business income?” According to Internal Revenue Code (IRC) §864(c), to be established as qualified business income, the income just be “effectively connected” with a United States trade or business. The IRC code then proclaims that investment income does not count. Still, the answer as to whether an investor qualifies is not that simple. IRC §864(c) also expresses that for income such as rent to be considered effectively connected depends on two factors: 1) whether the income is procured from assets used in the business, and 2) if the actions of the business are a tangible factor in generating the revenue. In other words, if you own one or a few rental properties and do nothing else but collect rent, you are probably not entitled to the deduction. However, if you are engaged in a business, which includes such activities as buying material, making repairs, and maintaining the properties, you likely qualify. Your tax preparer should surmise whether you meet the requirements based on an examination of your income and expenses on your rental properties. If he or she concurs you qualify, you must then take into account stipulations on how your deduction will work based on Section 199A. It is rather complicated and we suggest you meet with your tax preparer to sort this out. Should you have any questions, you are welcome to contact us. Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses. For more information call 661-259-1967 or visit www.scvprotaxservices.com. Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.

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