Considering An Investment Property? New Tax Law Means It

By Ryan Coon, CEO and co-founder of Rentalutions

While the unusually fast push-through of the Tax Cuts and Jobs Act raised eyebrows around the country, potential real estate investors have reason to cheer now that it’s passed. The law, which will affect the taxes we file for 2018 (meaning those we submit in 2019) through 2025, includes several provisions that could make being a landlord more profitable than ever.

Here are highlights of the changes that are likely to have the greatest impact.

1.Keep More of the Money You Earn (if You’re an LLC)

The new tax law offers a pretty cool win for landlords who operate as LLCs. It allows them to pay taxes on less of their income, which effectively lowers their tax rate. To take advantage of this benefit, though, you have to file as an LLC once you buy property and start renting. But that’s a smart choice for many reasons. For example, it can also help lower your exposure to liability.

The Nitty-Gritty

Here are the specifics:

• LLCs can now deduct 20 percent of qualified business income. In other words, if you operate as an LLC, you may be eligible to pay taxes on just 80 percent of the total amount you earn from rent.
• LLCs are pass-through entities, meaning the income generated by an LLC flows directly to its owner’s personal tax return. If an individual is in, say, a 37 percent federal tax bracket with rental income, he or she would effectively pay 29.6 percent because of the new 20 percent rule. So while the tax rate itself wasn’t lowered for LLCs, the outcome will be lower taxes for those organized in this way.

• Increase of the standard deduction: Under the new law, the standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples filing jointly. This means that far fewer people will save money by itemizing deductions – including the mortgage deduction. Translation: one of the major incentives for buying a home is now gone.
• Limit on state and local property tax deductions: Today, homeowners can deduct state and local property taxes on their federal returns. The new law limits that deduction to $10,000 (for individuals and couples). In other words: one cost associated with homeownership is about to go up for many people.
• New limit on mortgage interest deductions: The new law lets homeowners deduct interest paid on mortgages up to $750,000, a drop from $1 million under the old law. Most U.S. homes are worth less than the new limit, but the change could have a ripple effect. People who were thinking of upgrading to houses worth more than $750,000 might now decide not to move, meaning the supply of less-expensive homes could be tighter than it otherwise would have been. This, too, could cause would-be homebuyers to keep renting longer.