All Forum Posts by: Brandon Hall

@Dmitriy Fomichenko if the interest is qualified business income, you are subject to the new pass-through rules. I'm not sure that interest qualifies. 

@Varun Parkash state and local taxes are capped at $10k. Mortgage interest is allowed to be deducted on the first $750,000 in new acquisition debt. So in your example, you get a $10k income+property tax write-off and $14k in interest. 

@Bob M. we're not sure yet. It depends on whether the interest income qualifies as qualified business income.

@Chris K. from my understanding, I don't believe capital gain is considered "qualified business income" but I could be wrong. Capital gain is a factor in the calculation though, so it's important to plan around.

@Peace Lily to answer that question, an analysis would need to be run using your numbers. 

@Eric Ashby unadjusted basis is purchase price, plus certain closing costs, less value allocate to land. 

@Elizabeth Goff the $157.5k threshold is taxable income. Basically, the sum of all income streams. 

@Danae Meurer I don't believe NOLs apply to passive losses.

@Stuart M. No, property management is a service based business and does not qualify unless your taxable income is below the threshold amounts ($157.5 if single // $315k if married)

Bonus depreciation is only eligible on 20 year-or-less property. Rental property does not qualify. However, certain components of non-residential (NNN, short-term rentals, office, etc) will qualify for 100% expensing.

@Varinder Kumar If it's movable (like a tiny home or a mobile home) it may qualify for 100% expensing. Otherwise, you're most likely depreciated over 27.5 years. 

@Austin M. I really enjoy Watson's content but I believe their thoughts on the rental income is incorrect. They neglected to take into account the 2.5% deduction on unadjusted basis. 

If you receive net rental income of $500,000, and assuming your rentals (or allocable share of rentals) have an unadjusted basis of $3,000,000, and did not pay wages, your deduction is the lesser of:

1. 20% of qualified business income = $100,000

2. 2.5% of unadjusted basis = $75,000.

So your deduction is $75,000.

@Scott Jensen the new legislation does allow for pre-payment of property tax, but does not allow for pre-payment of 2018 income tax.

Per the text you pasted in your post:

The conference agreement also provides that, in the case of an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, the payment shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction. Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.

@Mark Zingale in some states, yes. But not all states.

@Curt Smith SE tax on rental income was removed. Sigh of relief.

@Vince DeCrow I’m confused by a few of your thoughts/comments.

1. Buying a property with more units does not help classify it as commercial from a tax perspective. A 1,000 unit property is still residential. Maybe you are talking about forcing appreciation on the cap rate for properties with >4 units?

2. There is no mortgage interest cap on single family homes as long as they are rentals. Only if it’s your primary or secondary residence.

3. You cannot immediately expense capital expenditures with a useful life of greater than 20 years. This is true in current law and the proposed bill. So if you improve plumbing, electricity, HVAC, and other components affixed to the structure, you can’t expense them as they will have useful lives of 27.5 years.

@Clancy Catelli you’re right on the money. But when you receive 1099 income, you can do so in an S-Corp. 

So you receive $50k in 1099 income but since you’re taxed as an S-Corp, you pay yourself a wage of say $20k. The $20k in wages is subject to the 15.3% tax, so you pay $3,060 in FICA. The business gets to deduct the employer share of FICA, so the remaining $30k of net profit that wasn’t paid out as wages is now $28.5k. Then you deduct health insurance of $5k and you get to write off business expenses for maybe another $5k. 

So now we’re down to $20k in wages and $18.5k in business income. We then contribute to a 401k at the employee $18k max as well as the employer 25% of your W2 - basically you are able to contribute your entire $20k of wages to the 401k.

This leaves you with $18.5k of reportable income.

And now we have this freebie tax deduction. 20% of your combined qualified business income which does not include wages you pay yourself. So you get another $3,700 deduction.

And once we factor in your standard deduction of $12k, you’re at $2,800 in taxable income. This results in income tax of $280.

Your total tax paid was the FICA of $3,340.

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Compare that to earning a W2 wage of $50k. Your FICA tax will be $3,825. 

You max out the 401k at $18k. Now we’re down to $32k. We get the standard deduction of $12k which leaves us with taxable income of $20k. That yields another $2,200 in taxes.

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So W2 earner pays $6,025. The 1099 pays $3,340.

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Again, this is an illustrative example. Everyone’s situation is unique and numbers will differ greatly from person to person. 

@Jocelyn Canfield true but a 1099 contractor can be paid through an S-Corp and reduce FICA exposure via paying a reasonable wage. They can deduct health insurance and other ordinary and necessary business expenses. They can max out contributions to 401(k)s at $54k per year.

Ultimately, it’s a better to have control over your income and the corresponding deductions.

@dong 

@Dong Yan does not apply to rentals.

@Jules Semanchuk sure thing!