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Deduct 20% of your rental income when you file your 2018 income taxes!

This was just posted by the National Association of Realtors Legislative Affairs office:

Eligibility of rental income 
If you generate rental property income, that income can also qualify for the new deduction, as long as you can show that your rental operation is part of a trade or business. The IRS has released proposed guidelines that include a bright-line test, or safe harbor, for showing that your rental income rises to the level of a trade or business. Under that safe harbor, you can claim the deduction if your rental activities—which include maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities—total at least 250 hours a year. If your activity totals less than that, you can still try to take the deduction, but you’ll have to be prepared to show the IRS that your activity is part of a trade or business.

My interpretation – what this means for rental property owners:

The Tax Cut and Jobs Act lowered the corporate income tax rate from 35% to 21%.  This rate only applies to regular “C Corporations” that pay tax at the corporate level.  To compensate small businesses and pass-thru entities, such as partnerships, S-Corporations, and Limited Liability Companies, where income taxes are paid, not at the entity level, but at the level of the partner or member, The Tax Cut and Jobs Act said that such pass-thru entities can lower their taxable income by 20%.  For example, if you report $100,000 in net taxable income from your rental properties, you would pay income tax on only $80,000 of that taxable income.

As stated above, you must be actively engaged in the management of your properties.  The 250 hour “safe harbor rule” means that you only need to spend an average of 5 hours per week on your properties.

This information is intended for general information related to investment real estate.  Ben Frederick Realty, Inc. has expertise in brokering multi-unit apartment properties and mixed-use commercial investment real estate.  Ben Frederick Realty, Inc. is neither a qualified tax adviser or lawyer.  Please check with your tax and legal professionals.

Click here to read the IRS’s actual rule.

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