All Forum Posts by: Brandon Hall

@Chase Gochnauer yes but it will apply only to new property in the first year it's in service (so if you're going for that, the cost seg needs to be performed in year 1). 

@Joe Splitrock allocating more value to land would really only work for new acquisitions, not current properties. 

@Austin M. correct. If you have low basis property, you may be out of luck.

@Austin M. realtors will not qualify as they are a service business UNLESS the taxpayer's taxable income is below $157,500 ($315,000 if married).

@Austin M. Interesting point. I'm actually not sure. Unadjusted basis is defined throughout the IRC as the original cost basis. I searched through the code this morning and didn't anything that explicitly rules out land from the definition of "unadjusted basis." The Tangible Property Regs released in 2014 that constantly refer to the "building's unadjusted basis" thus excluding land. But the question is - what is the "property's" unadjusted basis? I feel that the GOP plan is referencing the entire cost basis, including land, but I could be wrong. 

@Chihiro Kurokawa you will receive an allocated portion of the passthrough deduction. 

@Jeff Sheraton basically, you can now fully write off assets that have a useful life of 20 years or less. Since rental properties are depreciated over 27.5 years, they don't qualify for 100% expensing. But ripping up the old driveway and replacing it with a new one would qualify for 100% expensing because land improvements have useful lives of 15 years.

@Michael Guzik hang in there, it's only going to get more confusing as we find more loopholes :)

@Austin M. where did you see that land is not included? Here is the code:

‘‘(ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.

‘‘(6) QUALIFIED PROPERTY.—For purposes of this section: 

‘‘(A) IN GENERAL.—The term ‘qualified property’ means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—

   ‘‘(i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,

   ‘‘(ii) which is used at any point during the taxable year in the production of qualified business income, and

   ‘‘(iii) the depreciable period for which has not ended before the close of the taxable year. 

‘‘(B) DEPRECIABLE PERIOD.—The term ‘depreciable period’ means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of— 

   ‘‘(i) the date that is 10 years after such date, or 

   ‘‘(ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to sub2 section (g) thereof).

@Amy Webber personally, I hate 529 plans. I wrote a BP article a while back on how to better structure your tax position by paying your kids and moving money into a Roth IRA, instead of contributing to a 529, and I got thrashed by financial advisors.

Admittedly, I now hate 529s a lot less. Opening them up to pay for qualified educational expenses for the child's entire schools career (essentially) makes 529s a much better vehicle. When you invest in a 529, you can let your capital grow which will allow you to pay for these expenses tax free.

Should you do it? I don't know - talk to your CPA/financial advisor. 

@Austin M. the $315k limit is taxable income. Taxable income is on Line 43 on the current Form 1040.

So my team and I have literally been sitting around all day to dream up new strategies for our clients (who are all real estate investors).

Here's one that we've come up with.

For new acquisitions, if the rental will likely generate passive losses, allocate more basis to land and take less depreciation. 

The new pass-through deduction is a freebie. But the deduction is only available if you have net taxable income after all expenses, including depreciation and amortization. 

So when you buy the next property, allocate more basis to land. This will reduce your depreciation expense. But if you have a smart tax advisor, you can likely net out the lost depreciation expense with this new freebie deduction. 

The tax benefit is realized on the sell-side. When you liquidate a rental, you pay depreciation recapture taxes on the depreciation you've taken over the life of the rental. 

So if you report less depreciation over the hold period, you pay less recapture taxes in the end. But best of all, it didn't hurt you during the hold period because you utilized this new freebie deduction each year to bring your taxable income down to $0.

Note: this is not a relevant strategy if you purchase property that is likely to produce high amounts of net income after depreciation every year (NNN, Commerical, Large Apartments, Short-Term Rentals).

Second Note: more planning will be required for folks that want to utilize cost segregation. You don't want to crush it on the cost seg side and not be able to utilize this freebie deduction because you no longer have net income to report. 

I want to take a minute and show an example related to the new pass-through deductions. 

Sole proprietors, LLCs, and S-Corps that are not service business (unless they are below the wage thresholds...explained later) now qualify for a deduction on "combined qualified business income." The deduction is equal to the sum of: 

• The lesser of:
  • Combined Qualified Business Income, or
  • 20% of the excess of: the taxable income divided by the sum of any net capital gain.
• The lesser of:
  • 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer, or
  • taxable income reduced by the net capital gain.

--

• Combined Qualified Business Income Amount (in general) is the lesser of:
  • 20% of the qualified business income with respect to the qualified trade or business, or
  • The greater of:
  • 50% of the W-2 wages with respect to the qualified trade or business, or
  • The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property. 

--

As an example, let's assume we don't have capital gain or qualified cooperative dividends. Let's also assume that we have a $1MM property that produces $100k in net income. The property is held in an LLC and does not pay W-2 wages.

Because we don't have capital gain or dividend income, all we need to do is determine "combined qualified business income."

In this example the deduction will be the lesser of: 

(1) 20% of the net income ($20,000) or
(2) the greater of:
   (2a) 50% of wages paid ($0); and
   (2b) 25% of wages paid ($0) PLUS 2.5% of the basis of the property ($25,000). 

Because $20,000 is less than $25,000, you would take a $20,000 deduction on your tax returns. 

Note that if an individual's taxable income (that means ALL income) is less than $157,500 ($315,000 if MFJ), you do not have to go through this calculation. Instead you just take a 20% deduction on qualified business income. Additionally, all service businesses (realtors, lawyers, property managers, accountants, etc) will be able to take the deduction if the individual's taxable income is below these thresholds. Once taxable income goes above these thresholds, service businesses are phased out of the deduction.

Last thing - the deduction is calculated on a business-by-business basis. That means that you can have five businesses and each business will need to run through these calculations to determine the deduction. Additionally, you can be a PARTNER in businesses and (we're assuming) the business would need to tell you what your allocable share of the deduction is.

@Megan Hirlehey the Section 121 exclusion allows you to claim a $250k ($500k if married filing joint) "deduction" from the gain realized on the sale of your primary residence as long as you have lived in it for the past 2 of 5 years. The gain = sales price - basis.