This article points out the changes in the new United States tax code with implications for real estate, and our resident legal expert, Rolando Rodriguez, interprets these changes. Investors take note, what you don't know can hurt you.
Item One: Home Mortgage Interest Deduction modification.
- Old acquisition indebtedness deduction cap: $1 million
- New acquisition indebtedness deduction cap: $750,000
- Old Home Equity indebtedness cap: $100,000
- New Home Equity indebtedness cap: Suspended
Translation: The personal real estate investment cap for mortgage interest deductions has gone down 25%, and the amount you can claim as an individual has been eliminated entirely. This development exposes the individual, or personal, taxpayer to higher taxes by virtue of this decrease in deductions. Not to worry though, this shortfall can be addressed with appropriate legal maneuvers discussed below.
Item Two: State and Local Tax Itemized Deductions
- Itemized Deduction for combined non-business state and local property taxes and income taxes limited to $10,000
Translation: This is the "salt" deduction we've been hearing about. Last year the deduction was unlimited numerically, but you had to choose between deducting sales or state income tax. Now you can deduct sales tax, state income tax, or local property tax, but only up to a cap of $10,000. This particular item will favor lower earners when compared to the old system, as $10,000 is a fairly high number in state and local taxes that in most cases would need to be combined in order to achieve except by the most highly taxed individuals.
Item Three: New Deduction for Pass-Through Entities
Note: Pass-Through entities- some legal partnerships, corporations, sole proprietorships, and trusts designed for assets to “pass through” on their way to the individual tax return
- Pass through entities can deduct 20% of qualified business income in determining taxable income for a year. The new tax law now provides for a flat 21% tax rate for corporations (the new tax rates for individuals are here).
Translation: Here’s where it gets a little complicated. You can imagine how that could have been problematic without more changes: If companies were taxed at a lower rate than individuals, the pass-through scheme doesn't work. But creating a new tax rate for the entities would take away the pass-through nature of the entity. Congress' solution? Business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates less a deduction of up to 20% to bring the rate lower.
This is the item that allows for legal maneuvering to save on your taxes. Pass through entities will be able to deduct 20% of qualified business income. This deduction applies in whole to the first $157,500 of qualified business income for the individual filer, or $315,00 for the joint filer. The benefit percentage shrinks to nothing over the next $50,000 single/$100,000 joint filers. Remember, these deductions from income reduce your taxable income on your individual return. It does not change how you calculate your taxable income inside your business. Business expenses remain deductible.
The deduction will take into account some limitations at this point and we recommend consulting with your tax preparer or tax attorney. For more information on how your advisors at Engel & Volkers can help you can email Rolando at Rolando.firstname.lastname@example.org or call the office at 321-821-4515.