A Realtor's Guide to the New Tax Law

Some of the biggest winners of the new tax law are going to be workers who already have non-employee income. One group of professionals that commonly fall into this category are real estate brokers.

The 2018 Tax Cuts and Jobs Act, of TCJA, offers tremendous tax opportunities for individuals who are not salaried employees, but contractors who receive 1099 income. Many of these individuals would typically report their 1099 income on their Schedule C. While this may not have been an optimal tax setup even prior to the tax law, the tax advantages that may not be utilized are prospectively more material in monetary value.

The new 20% pass-through deduction allows for realtors to avoid taxation on the top 20% of their income. For example, if a realtor who files ‘Married Filing Jointly’, or MFJ, has a combined adjusted gross income of $300,000 with their spouse, they are entitled to deduct the top 20% of their income (from $240,000-$300,000 in this case). One must realize that this AGI deduction is taken off the top, so the income that would normally be taxed at the highest marginal bracket is not taxed. Assuming one is taxed at a 33% effective tax rate while in this bracket, this allows for over $20,000 in tax savings.

This $20,000 in tax savings is only a portion of the entirety of the potential tax savings. Once one is properly incorporated, they may be able to take advantage of other opportunities to deduct from their AGI. For example, one may use an SEP IRA (up to the lesser of 25% of individual compensation or $54,000). A deduction such as an SEP IRA also allows for realtors to avoid falling within income ranges in which the 20% passthrough deduction phases out. Individuals who file single will begin to experience a phase-out from 100% of the deduction allowed to 0% of the deduction allowed between the AGI amounts of $157,500-$207,500. For those filing MFJ, this phase-out range will be $315,00-$415,000.

One must note that this is not a phase-out based on gross income reported, but rather AGI. By utilizing deductions such as the SEP IRA, realtors can both 1) receive substantial tax deductions and 2) lower their AGI to better position themselves to take advantage of the 20% passthrough deduction.

There are various other tax advantages to creating a passthrough entity for realtors. For every day that a realtor has not incorporated, they are likely paying more in tax than they are legally required. Realtors who do not properly position themselves for the new tax law could lose substantial tax savings.