Considering An Investment Property? New Tax Law Means It

Federal Income Taxes, Property Taxes, Tax Returns, Taxes


By Ryan Coon, CEO and co-founder of Rentalutions

While the unusually fast push-through of the Tax Cuts and Jobs Act raised eyebrows around the country, potential real estate investors have reason to cheer now that it’s passed. The law, which will affect the taxes we file for 2018 (meaning those we submit in 2019) through 2025, includes several provisions that could make being a landlord more profitable than ever.

Here are highlights of the changes that are likely to have the greatest impact.

1.Keep More of the Money You Earn (if You’re an LLC)

The new tax law offers a pretty cool win for landlords who operate as LLCs. It allows them to pay taxes on less of their income, which effectively lowers their tax rate. To take advantage of this benefit, though, you have to file as an LLC once you buy property and start renting. But that’s a smart choice for many reasons. For example, it can also help lower your exposure to liability.

The Nitty-Gritty

Here are the specifics:

  • LLCs can now deduct 20 percent of qualified business income. In other words, if you operate as an LLC, you may be eligible to pay taxes on just 80 percent of the total amount you earn from rent.
  • LLCs are pass-through entities, meaning the income generated by an LLC flows directly to its owner’s personal tax return. If an individual is in, say, a 37 percent federal tax bracket with rental income, he or she would effectively pay 29.6 percent because of the new 20 percent rule. So while the tax rate itself wasn’t lowered for LLCs, the outcome will be lower taxes for those organized in this way.

There are a few restrictions for those earning significant income from their rental properties. You can read all about them on our blog.

2. Enjoy Higher Demand for Rental Units

It’s always good to get into the market when demand is high for what you’re selling, and many experts think that the new tax law will mean fewer people buy homes. Translation: more renters.

That’s because the new law makes it less advantageous (from a tax perspective) to buy a house. The outcome is that renting looks better by comparison, so people who were on the fence about buying may decide to rent longer.

The Nitty-Gritty:

There are three specific tax law changes that will potentially make buying a home less of a financial win:

3. Take Advantage of More Affordable Buying Opportunities

Lower demand for homes (especially in more expensive coastal markets) will likely translate to lower home prices. If you’ve been thinking about buying a rental property, this is great news, especially if you’re in a part of the country that tends to have higher home prices and higher taxes.

If you haven’t seriously considered real estate as an investment, now may be the time to start.

Remember: Always Talk to Your Tax Adviser

One important thing to note here: everybody’s individual situation is different, and there’s no right path forward for every investor. What’s more, the IRS hasn’t yet issued guidelines on how to interpret the new tax law, so there may be additional wrinkles to consider once it does.

Before making any major decisions about your finances, be sure to consult with a CPA who can help you understand how changes to the tax code will affect you.

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Photo ©iStockphoto.com/eternalcreative

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