Late last year congress passed a tax reform bill. How will this bill affect real estate? Elizabeth Mendenhal, president of the National Association of Realtors argues that the bill presents positive and negative changes. “The results are mixed. We saved the exclusion for capital gains on the sale of a home and preserved the like-kind exchange for real property. Many agents and brokers who earn income as independent contractors or from pass-through businesses will also see a significant deduction on that business income. Despite these successes, we still have some hard work ahead of us. Significant legislative initiatives often require fixes to address unintended consequences, and this bill is no exception.”
Popular opinion argued that the effects of the bill on real estate would be decidedly negative. Not entirely. In fact, an unprecedented benefit was passed within the bill. With all the talk about the new tax bill having a Negative effect on Real Estate a large benefit slipped through the cracks for Real Estate Investors. The proposal drops the top individual marginal tax rate. Additionally, the tax plan gives a 20% reduction on taxable income to pass-through businesses. So long as these businesses are owned by individuals that make less than $157,500 or joint filers claiming less that $315,000. Furthermore, as an investor you will be eligible of a federal tax deduction up to 20% of your Net Rental Income under the new bill.
What Is Net Rental Income?
Net Rental income is your gross rental income minus expenses such as mortgage interest, taxes, insurance and repairs to property. Essentially, your takeaway after losses. Coming in under section HR1, this stipulation is part of the cluster of pass-through deductions. Designed to benefit investors, this incentive only applies to properties with a net income. Operating at a loss? Unfortunately, no deduction for you. However, investors with shares in real estate investment trusts or REIT’s can deduct the same percentage of income earned from dividends.
Looking to invest? With taxes on the side of real estate investors there’s no time like the present. Contact Home Qualified today to learn more.