How Does the New Tax Law Affect Real Estate Professionals?
Major Provisions Affecting Real Estate Professionals (Final Part of the Saga)
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If you’ve followed through on this little tax explanation journey, then you’re probably dying to know--what about the real estate professionals? Do they get tax cuts? Did the best deductions get deducted from the new law? Well, just hold on a moment--we've got to make sure that everyone who needs to knows what happened to homeowners and commercial real estate owners. Also, don't forget to check out some homes for sale in Ohio.
Congress proposed a couple more provisions, but only a few changes directly affected real estate professionals:
- Deduction for Qualified Business Income
- Section 179 Expenses
- Denial of Deductibility for Entertainment Expenses
Deduction for Qualified Business Income
The new bill decreased the tax rate for corporations from 35% to 21%, which made Congress think: hey, maybe noncorporate businesses deserve a deduction too! So, now noncorporate businesses receive a deduction of 20% for qualified business income, but only if they count as a non-personal service business. Non-personal service businesses are exactly what they sound like. Real estate agents count as personal service businesses because they “personalize” their services depending on the customer, but they could actually still take advantage of the deduction.
Thanks to the National Association of Realtors (NAR), the new personal service income exception allows personal services like real estate agents with taxable income less than $157,000 for single filers and $315,000 for couples to claim the 20% deduction. Even if the taxable income level hits above that mark, the deduction will be phased out over an additional income of $50,000 for single filers and $100,000 for couples before it’s lost completely. The math would total approximately $207,000 and $415,000 for single filers and couples respectively.Additionally, non-personal service businesses with income below the thresholds can also claim the deduction and may still be able to get it even if they pass the thresholds. However, the deduction might be limited by the wage and capital limit exception.
Section 179 Expensing
Section 179 refers to an immediate expense deduction that business owners could use for buying new equipment for their business. These assets typically mean office supplies, business machinery and computers, and other equipment depending on the type of business. But, the new law definition has expanded to include enhancements like heating and cooling systems, fire alarms, and security systems.
The amount of qualified property you could cover with the deductible could now reach up to $1 million. Phase-out limitations have increased to $2.5 million, too! The bill also increased the first year depreciation that you can get for business vehicles to $10,000. In case you’re curious, the second year is $16,000, the third year is $9,600, and any year after the fourth is $5,760.
Denial of Deductibility of Entertainment Expenses
To translate, “denial of deductibility of entertainment expenses” means no more discounts on anything fun like entertainment, amusement, or recreation. This includes membership dues for any club or facility that’s used for business, pleasure, or other social purposes. That means the present law’s exception for fun related to the business isn’t allowed anymore either. On the bright side, we can still deduct 50% of food and beverage expenses associated with the business (those travel meals!).
And so the saga comes to a close. If you need a refresher on what’s happening with homeowners and commercial real estate (or if you just like reading our articles), feel free to loopback. Either that or you can enjoy all the new calculations you’re going to need to do for your taxes.