The new tax bill has both preserved some key breaks, and instituted new ones which give real estate investors sizable advantages. This makes expanding real estate investments, and even getting started in real estate investing a very valuable move for those needing more tax savings in 2018.
The Tax Cuts and Jobs Act (TCJA) has been one of the most controversial laws and tax changes in decades. It has dominated news headlines, and fueled strong opinion pieces for those who see it delivering great benefits, as well as those who have made it sound like the tax apocalypse for those living in high cost states like NY, CA and NJ. Whether individuals and businesses will come out ahead or in the red will rely heavily on their personal money moves and their accountants and tax advisors. Yet, once they dig into the numbers, many may find that buying real estate in 2018 is the pivotal factor which makes all the difference in how big those tax bills or refund checks are.
What has changed? What’s the same? What provisions of the Tax Cuts and Jobs Act can help individuals slash their tax exposure the most, and maximize their next gains?
The new tax act has instituted a short window of opportunity to enjoy a 100% first year bonus depreciation deduction. This break is available until 2022, when it will be reduced by 20% per year, until eliminated. This break is also retroactive for 2017 tax filings on property ‘put in service’ by September 2017.
According to accounting firm Smith & Gesteland, this deprecation bonus may apply to:
- Film, TV and live theatrical productions
- Luxury vehicles
- Investments made up to $1M
- Improvements to commercial property
- Improvements made to lodging and rental property
Bonus depreciation on improvements to real estate can apply to:
- Security systems
- Fire protection
Lower Business Taxes
The Tax Cuts and Jobs Act has cut the corporate income tax rate to just 21%. It has also made it very attractive for corporations to bring back offshore money and reinvest it in the US. Some major companies are. Pass-through business entities, such as LLCs now enjoy a 20% deduction on income. This can all help successful existing real estate companies expand and become more profitable, while making it far more attractive to launch a new real estate startup, or begin investing in real estate through a legal entity, like a Limited Liability Company.
Retirement Account Contributions & Investing
One of the important set of tax breaks saved in this overhaul is the tax deductions, tax deferment and tax free gains available to those who contribute to retirement investment accounts. This includes IRAs and 401ks. Similar benefits can be found in contributing to Health Savings Accounts (HSAs) and Education Savings Accounts (ESAs).
An increasing number of individuals are becoming aware of the ability to open or roll over existing retirement accounts to self-directed versions. These funds can then be used to invest directly in real estate, mortgage notes, real estate businesses and Real Estate IRAs or IRA LLCs.
1031 Like-Kind Exchanges
The capital gains tax deferring benefits have also been preserved in the new tax rules. The provisions of the Internal Revenue Code (IRC) Section 1031 allow real estate investors to trade up or diversify their portfolios when cashing out of one property, and reinvesting in others, without taking any immediate tax hit. With the new above income and depreciation breaks, this may the ideal time to restructure portfolios and reduce tax exposure, while fattening net gains.
Many things changed with the Tax Cuts & Jobs Act. Others didn’t. While some individuals may need to urgently act to avoid a harsh tax hit this year, and looking forward, others may benefit. Especially those who make smart business and real estate investments. There are opportunities out there. Speak to your tax, finance and real estate advisors, and get personalized advice for your individual situation.