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trump tax impact on investors? why arent we talking more about it
I am reading that the mortgage deduction is going to be for loans up to 750k on new deals for primary residency....., how about for rental properties? is that any different? is this capped to 750k total or is it per property on rental? also what about the property tax for rental is that per property or accumulative? its been very difficult to find the details on this... i am trying to understand if i should keep my structure as a schedule E or if i should now consider incorporating as S Corp or something similar...thanks in advance to everybody
Can the tax experts here chime in on this? yes yes we get this is not legal advice and we need to talk to cpas and tax consultants : )
heellppp
Hi Alex,
The changes to the mortgage deduction and property taxes only affect Schedule A (personal residences). It will not impact rentals, fortunately.
Originally posted by @Brian Schmelzlen:
Hi Alex,
The changes to the mortgage deduction and property taxes only affect Schedule A (personal residences). It will not impact rentals, fortunately.
great! thats perfect thank you.
I think there’s two reasons, the first is because nothing is set in stone yet so it’d all be hypothetical talk, and second what Brian Schmelzlen said it’s more about primary residence than rental property.
There are a number of threads on the new tax laws. Supposedly they now have a reconciled bill, but I've yet to see very many specifics. I'm sure those will be coming very soon. Its even less clear now that they have the votes to pass this mess.
I did read an interesting opinion piece (which I cannot locate at the moment) saying that because this has been drafted and revised so hastily there will be all sorts of loopholes in this law ripe for exploitation. 2018 taxes will be even more challenging than normal.
So if I own a bunch of rental properties that are all paid off (in name only not an llc) I can still deduct property taxes (on my schedule e) under this new tax plan?
Any new taxes or tax deduction or other benefits or drawbacks that as landlords or buy and hold investors we should be award of? Thanks.
Found the opinion piece: What Happens if the Tax Bill Is a Revenue Disaster?
Jonathan Chait raises a good point, which many of us were already thinking about: for all the debate about whether the tax bill will partially pay for itself, it’s actually more likely that it will end up worsening the deficit by far more than most estimates suggest. The reason is simple: the bill is junk, hastily drafted and full of exploitable loopholes. Once the tax lawyers and accountants get to work, they will probably find ways for their clients to avoid hundreds of billions in taxes that even the JCT estimates still assume will be paid.
Originally posted by @Jon Holdman:
Found the opinion piece: What Happens if the Tax Bill Is a Revenue Disaster?
Jonathan Chait raises a good point, which many of us were already thinking about: for all the debate about whether the tax bill will partially pay for itself, it’s actually more likely that it will end up worsening the deficit by far more than most estimates suggest. The reason is simple: the bill is junk, hastily drafted and full of exploitable loopholes. Once the tax lawyers and accountants get to work, they will probably find ways for their clients to avoid hundreds of billions in taxes that even the JCT estimates still assume will be paid.
That is interesting, and probably true. They were working on it for a long time before it became an actual bill, but it has been hastily amended a lot in a very short period of time (especially by legislative standards).
From a policy standpoint, that can be a disaster. As a CPA, I hope it is true. It makes my job a lot more fun when there are loopholes that I can help my clients legally exploit.
Cuz like everyone above said, there is now new tax law yet. I have no interest learning about it till it is passed and there is something to study on.
No matter what investors will be smarter and find a way around it. It's what they do. They learn to thrive in all situations not just good ones.
Originally posted by @Brian Schmelzlen:
That is interesting, and probably true. They were working on it for a long time before it became an actual bill, but it has been hastily amended a lot in a very short period of time (especially by legislative standards).
From a policy standpoint, that can be a disaster. As a CPA, I hope it is true. It makes my job a lot more fun when there are loopholes that I can help my clients legally exploit.
You could be right ("they were working on it for a long time...") but I seriously doubt it. Just like with the Obamacare repeal and replace its easy to blabber about "tax reform". Its much harder to actually do it. Add in the need to do it under reconciliation rules rather than normal order in order to avoid the filibuster and you end up with a steaming pile of doo-doo. Which is where we are.
The most glaring loophole for RE investors is the 21% corporate tax rate. Currently if you make >416,000$ you're taxed at 39.6% tax rate, and your RE income will be taxed at that rate. If you make an LLC (corporation) your corporation (RE) will be taxed at 21%, so all your real estate income will be taxed at 21% instead of 39.6%. While many things are undecided, the cut in corporate tax rate has been a mainstay in every draft and will almost certainly be in the final draft.
Disclaimer: I'm not a tax professional, I just do my own taxes.
@Alex J. the mortgage interest deduction limit doesn't apply to investment properties. The facts are 70% of Americans take the standard deduction and all those people would see taxes decrease. Most every income level sees a decrease.
This is a good article with proposed rates, so you can run your own situation.
@DDill
21% corporate tax rate applies to C corps.
LLC/S-corps are pass thru entities and come with a 20% deduction, with a limit based on your wages.
Not sure why investors get worried about these tax laws in terms of deductions.
The reason why they could never eliminate the deductions for rentals is because operating a rental is a business activity and paying property taxes is an expense that is no different than any other expense we pay. Same with the mortgage interest. Interest expense is interest expense. Interest expense is always a deduction for a business.
For personal homes, thats a different story. You don't get to deduct your interest on your car loan or any other personal loan. The govt had to add the mortg interest as a deduction in order for us to be able to take it. Now they're just rolling it back - or rolling it back for certain thresholds. Same with a second home/vacation home. Thats not a business activity so it makes that they can roll it back.
But if your business takes out any kind of loan - vehicle loan, equipment, etc, - the business can always deduct the interest on that loan as an expense. It has to be accounted for some how. And property taxes are nothing more than an expense for a business as well.
I actually like what they did by rolling this back to the 750k amount for loans and 10k in property taxes. That basically means people in the high end will see a bump but us normal people will still have the deductions.
Where I think this tax bill comes into play the most for us investors is if the new bump in the standard deduction is going to create a net effect for average americans to think that buying homes is no longer the end all be all and more people will continue to believe that renting may make more sense.
As it is, I think we've had a lot of people that were converted to that thinking after this huge crash where they saw their parents lose a ton of equity in their homes and/or walk away with nothing. But now if they start seeing that the standard deduction bump is going to essentially mean they won't get any added value by itemizing deductions so that they can't use the mortg interest deduction as it would be less anyway, then that may convince even more people to rent.
And that is where I see the biggest net effect to investors from this tax bill. I think it will convince more people to rent longer. At some point, I think the democrats are going to roll these crazy things back once they re-take both houses after the trump debacle that it is. But if they don't and these cuts stick, I think its going to help inflate the renter pools for us which will drive up rents over the short and long term.
Originally posted by @Brian Schmelzlen:
Hi Alex,
The changes to the mortgage deduction and property taxes only affect Schedule A (personal residences). It will not impact rentals, fortunately.
Just to clarify. If have a bunch of rental properties (held in name only), under the tax bill, I can still deduct property taxes (and other rental management related expenses) on each of these properties in my schedule E, is that correct? They don't need to be held in a business structure (LLC, partnership, etc.) to qualify for the deduction?
However, I am now subject to state and local taxes, and I can only deduct property taxes up to $10,000 for my primary?
I also read there is a 23% tax deduction for business entities like LLC's for pass through income (rental income). That is set to expire in 2025 though I believe. I guess it would be prudent to move all properties from name to LLC.
Originally posted by @Aubrey P.:
Originally posted by @Brian Schmelzlen:Hi Alex,
The changes to the mortgage deduction and property taxes only affect Schedule A (personal residences). It will not impact rentals, fortunately.
Just to clarify. If have a bunch of rental properties (held in name only), under the tax bill, I can still deduct property taxes (and other rental management related expenses) on each of these properties in my schedule E, is that correct? They don't need to be held in a business structure (LLC, partnership, etc.) to qualify for the deduction?
However, I am now subject to state and local taxes, and I can only deduct property taxes up to $10,000 for my primary?
I also read there is a 23% tax deduction for business entities like LLC's for pass through income (rental income). That is set to expire in 2025 though I believe. I guess it would be prudent to move all properties from name to LLC.
Hi Aubrey,
Yes, you will still be able to deduct the property taxes, as well as your other operating expenses, on each of your rental properties on Schedule E. No business entity is required.
You will be allowed to deduct up to $10,000 in property taxes on your principal residence or on your state income taxes (or some combination of both).
The 23% tax deduction was in the Senate bill, but after conference committee that got reduced to 20%. It applies to properties held in your own name, as well as to LLCs and S-corporations.
Edit: Inadvertent double post
Thank you, Brian.
@Brian Schmelzlen I have a question on the 20% deduction for rental income. In own several properties and after deducting expenses, interest and depreciation, my rental properties show a net loss on my taxes. I am able to apply that loss against my W2 income for my day job. Am I correct that the 20% deduction would only be applicable if my rental properties were showing a profit on my taxes after all expense, including depreciation? I understand you are not giving tax advice, just looking to understand what conversations I may need to have with my CPA.
Originally posted by @Mike H.:
Not sure why investors get worried about these tax laws in terms of deductions.
The reason why they could never eliminate the deductions for rentals is because operating a rental is a business activity and paying property taxes is an expense that is no different than any other expense we pay. Same with the mortgage interest. Interest expense is interest expense. Interest expense is always a deduction for a business.
For personal homes, thats a different story. You don't get to deduct your interest on your car loan or any other personal loan. The govt had to add the mortg interest as a deduction in order for us to be able to take it. Now they're just rolling it back - or rolling it back for certain thresholds. Same with a second home/vacation home. Thats not a business activity so it makes that they can roll it back.
But if your business takes out any kind of loan - vehicle loan, equipment, etc, - the business can always deduct the interest on that loan as an expense. It has to be accounted for some how. And property taxes are nothing more than an expense for a business as well.
I actually like what they did by rolling this back to the 750k amount for loans and 10k in property taxes. That basically means people in the high end will see a bump but us normal people will still have the deductions.
Where I think this tax bill comes into play the most for us investors is if the new bump in the standard deduction is going to create a net effect for average americans to think that buying homes is no longer the end all be all and more people will continue to believe that renting may make more sense.
As it is, I think we've had a lot of people that were converted to that thinking after this huge crash where they saw their parents lose a ton of equity in their homes and/or walk away with nothing. But now if they start seeing that the standard deduction bump is going to essentially mean they won't get any added value by itemizing deductions so that they can't use the mortg interest deduction as it would be less anyway, then that may convince even more people to rent.
And that is where I see the biggest net effect to investors from this tax bill. I think it will convince more people to rent longer. At some point, I think the democrats are going to roll these crazy things back once they re-take both houses after the trump debacle that it is. But if they don't and these cuts stick, I think its going to help inflate the renter pools for us which will drive up rents over the short and long term.
I fully agree. I read that 70% of Americans already take the standard deduction, so less than 30% even take advantage of the mortgage interest deduction. The news media has tried to make a big deal about how reducing the mortgage interest deduction from $1M to $750, saying it will hurt the average person and ruin the housing industry. That is a far cry from the truth. It is going to have a minor impact on a small subset of high wage earners. Anyone shopping for $1M+ house is hardly going to change their purchase habits over this small tax change. The tax cut on high wage earners easily offsets the deduction change.
Originally posted by @Joe Splitrock:
@Brian Schmelzlen I have a question on the 20% deduction for rental income. In own several properties and after deducting expenses, interest and depreciation, my rental properties show a net loss on my taxes. I am able to apply that loss against my W2 income for my day job. Am I correct that the 20% deduction would only be applicable if my rental properties were showing a profit on my taxes after all expense, including depreciation? I understand you are not giving tax advice, just looking to understand what conversations I may need to have with my CPA.
Hi Joe. My understanding is that the deduction will be worth 20% of your "qualified domestic pass through" income, so if you have a loss you will not receive a benefit from it.
What matters most in the tax bill is the cut in the corporate tax rate to 21% from 35%. When you cut taxes on small business they will invest and grow. 70% of U.S. workers are employed by a small business. The other key is the repeal of the health insurance mandate.
Business's are getting crushed by health care costs. If they are not forced to provide health insurance then the insurance companies will have to lower costs in order to compete for and retain that business. One new executive order that was recently signed allows individual citizens to form groups which can purchase their own insurance and negotiate the way a larger business would. Another order allows purchasing across state lines. Previously if you had restaurants in several different states then you would have to purchase insurance separately for each one instead of having one plan for all your employees.
The small business owner is the growth engine of this country. Everywhere you look there is a small business and people trying to grow their passions into a livelihood. Ask a small business owner what this tax cut will do for them. 99% will tell you that they will be able to grow their business and hire more employees.
As a result, we will see the entire economy hit a reset button and no longer will I believe that stocks are over-valued. We could see GDP growth double. The whole idea that you have to offset the tax cuts in order to be deficit neutral is hogwash and counter to basic economic principle's. If the economy grows then the tax base grows.
A strong economy will equal a strong real estate market. Wages will grow and the buyer pool will grow. Millenials may even move out from mom and dad's house and buy one of their own. But they will still have that college debt, which is a whole other issue that the government created (and by the way, you can directly correlate the increase in college tuition with the government involvement in funding for college tuition). The Heritage foundation provides statistics for all that is mentioned here.
That's a very rosy/optimistic view of how things will turn out. Cutting taxes doesn't drive growth of business as much as supply and demand does. If there is no increase in demand for a product or service, why would a business person increase their employees wages or hire more workers and therefore lower their profits?
Unless a business is currently understaffed, there is no real reason to hire more people because you have the money to do so unless there is an actual need for having more workers.
The assumption of growing wages is also a narrative to which there is no direct evidence of such a thing occurring because of tax cuts. Trickle-down economics has never worked as intended. Owners and execs are more likely to buy back shares of stock and give out bonuses to execs than funnel money into the pockets of workers because there is no real incentive right now to increase wages and cut into profits.
First of all, how many companies do you think are publicly traded? The vast majority are not.
Secondly, if a company buys back stock then who benefits? Stockholders. Why? The company is investing in itself, the value will be greater. And all those millions of Americans who have investments through mutual funds in 401ks, 403b’s and public funds (like teachers, firefighters etc) will benefit.
Drain the swamp!
I'm no economist nor do I pretend to be, so let me get that out of the way. I find it humorous that people believe that giving companies extra money will lead directly to an increase in employment and wages, especially when unemployment is very low already and there is no incentive to hire extra workers if there is no increase in demand for that product or service.
Gallup shows that as of last year, only about half of American adults owned stocks. I don't know the numbers of how that shakes out by income bracket, but I'm willing to guess that the person making 25k a year doesn't have enough liquid funds to put aside in the forms of stocks, mutual funds, etc.
In the corporate sense, companies are recording record profits already and have still not increased wages. Supply and demand have always and will always drive business decisions. If you want to drain the swamp, start at the top...
There're millions of businesses that don't trade publicly and will reinvest through expenses. A successful business MUST spend money if they want to grow. Expenses such as healthcare, taxes, and overhead are just a few reasons small businesses are failing. It's also the reason large corporations are choosing to conduct business overseas. The point of going into business is to make money. Why is that a bad thing? The GOP is trying to monetarily incentivize domestic business. I feel we need to do something as we are losing jobs to other countries faster than we can replace them. If the plan works, the idea is more jobs and spending will help boost supply but mostly demand. I don't think its a fix all or sure deal, but feel its a start in the right direction.
Personally, we have been spending more money this year than the last ten. Rental properties in my area have skyrocketed since the GOP plan was first announced.
The latter part of this is, we take even more from small businesses and publicly traded corporations to see what happens.