As a property owner, you’ve likely done your fair share of research on how to best navigate the tax code. Now that the tax code has been updated as of December, you’re probably wondering what the new changes mean for your particular set of circumstances, for both the short term and long term. Let’s reassess your game plan, whether you’re a middle-class homeowner, landlord, or investor.
Good news if you have a business in real estate, especially for ‘pass-through’ businesses, whereby the tax is passed through to the owner from the business (sole proprietorships, S-corporations, partnerships, and limited liability companies). Real estate investors and landlords often set up LLCs, which are the most beneficial for their particular circumstances, as they provide privacy and asset protection. If you have a second home (or vacation home) that you rent out, setting up an LLC is also a smart option.
So what’s the advantage? There is now a deduction of 20% for qualified business income under pass-through businesses; this deduction is against business profits, and not wages paid to the business owner. As a result, only 80% is taxed, which can mean big savings, especially for real estate investors under LLCs. Most already structure their business this way, but those that don’t will be incentivised to switch over, and other taxpayers will establish them as well. In addition, businesses can deduct 20% of income from Real Estate Investment Trust dividends for even more savings.
The average couple or family that owns a home won’t see as rosy of a situation. Some deductions have been altered or lost, such as the lower mortgage deduction (from $1 million to $750,000) and interest on home equity loans ($10,000 max; unless the funds were used for home improvements). Additionally, there’s a new cap on state and local tax write-offs. The higher taxed states will be most affected. The upside is standard deduction has been doubled, however those that previously itemized will still see a loss.
If you own sizeable property, it’s a crucial time to reevaluate estate planning. The new tax code allows you to transfer up to $11.2 million per person without tax penalty, doubling the previous amount. Because of this generous provision, those that want to move estates to beneficiaries should do so sooner rather than later.
Take note that many provisions expire in 2025; if you’re motivated to change how you approach the many moving parts of how you manage the property you own and how you will file come tax time, also keep future impacts in mind, as provisions expire, and new tax laws can certainly pass.
As for the housing market, some experts believe these changes will lead to an increase in renters, but will in turn bring down housing prices. If you are buying a home soon or in the near future, it will be a bit more of a costlier endeavor then if you had purchased property in the past; the best thing to do is crunch the numbers for your budget, assess factors such as appreciation in value over time, and find tax savings elsewhere.
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