20% pass through deduction for rental income

[Wai Chan]

If me and wife own a piece of rental property (joint tenants and not under any LLC), does it consider as pass through entity? When we file tax jointly next year, can we claim the 20% pass through deduction for the rental income. I am not sure the definition of partnership mentioned as below. Is joint tenants a type of partnership?

This is a snippet of the article I read online:
>>For landlords, the most stunningly good provision of the TCJA is a new tax deduction for owners of pass-through businesses. This includes the vast majority of residential landlords who own their rental property as sole proprietors (who individually own their properties), limited liability companies (LLCs), and partnerships. With these entities, any profit earned from the rental activity is “passed through” to the owner or owners’ individual tax returns and they pay tax on it at their individual income tax rates.

Thanks.

[Michael Plaks]

@Wai Chan

You do qualify as a pass through entity, however it does not mean that you will have any deduction. More likely no than yes. Here is why.

1. The deduction is not 20% of the rent. The deduction is 20% of the net income, after all deductions, including depreciation. For most single-family landlords with mortgages this net income is actually negative, so there is no 20% deduction.

2. The deduction requires that you are a "trade or business." While it is not defined, the common understanding is that having one rental property is not enough to pass this test. We expect some clarifications from the IRS, which may or may not come.

[Wai Chan]

@Michael Plaks
Thanks for the response. I think I do qualify for the two points that you mentioned :)

[Brian Schmelzlen]

Hi @Wai Chan,

You do not need to form an LLC in order to claim the Section 199A deduction. Because it is you and your wife, it would be considered a sole proprietorship. If that wasn't true, it would be considered a partnership which also qualifies.

There are a number of components to this new deduction; it is almost a calculus equation in which you need to figure out one part in order to figure out the rest.  I would recommend talking to someone to figure out if you qualify for the deduction, and to perform some tax planning to best position yourself to take advantage of the deduction.

@Michael Plaks is right that there is a lot we do not know about the deduction yet.  There are over 100 points in the new tax law that specifically says that Treasury needs to issue Regulations on it (which is not a fast process).  However, Treasury is supposed to release something related to Section 199A (the 20% qualified pass thru business deduction) on June 30th, so hopefully we will have a better understanding of it in early July.

[Michael Plaks]

Originally posted by @Wai Chan:

@Michael Plaks
Thanks for the response. I think I do qualify for the two points that you mentioned :)

You may think so. What matters, however, is whether the IRS agrees with you. :)

Managing just one property, unless it is a MF or commercial property, almost certainly won't qualify.

[Wai Chan]

@Brian Schmelzlen
Thanks for the response. I will definitely wait for the announcement from IRS end of this month.

@Michael Plaks
I have a full time W2 job which has nothing to do with real estate but I also own and manage >15 units across several properties. (All under my name except one is under both me and my wife name) That's why I think I may qualify....I hope IRS can give out guideline so that there is no ambiguity.