A new tax ruling that protects valuable tax deductions has real estate professionals very excited. This decision by the U.S. Treasury Department and Internal Revenue Service lends clarity to what qualified business income is within the 2017 Tax Cuts and Jobs Act. It now offers a 20 percent deduction to real estate professionals whose businesses are pass-through entities.
Shannon McGahn, senior vice president of government affairs for the National Association of Realtors, calls this ruling a “significant victory” for real estate professionals.
“The finalized ruling represents a tremendous win for real estate professionals across the country,” says McGahn. “We are thrilled to see our members emerge from this process so favorably and for ensuring consistency and clarity within these policies.”
The main purpose of the 2017 Tax Cuts and Jobs Act was to reduce the corporate tax rate from 35 to 21 percent. However, this reduction did little to benefit pass-through business entities which comprise about 90 percent of all U.S. businesses. For reference, pass-through businesses are sole-proprietorships, partnerships, and limited liability companies (LLCs) that do not pay taxes at a corporate level. Instead the owners are directly taxed on their personal income. This avoids double taxation.
How this helps
Here are three key provisions the National Association of Realtors highlighted within the IRS and Treasury Department’s ruling that applies to real estate professionals:
- The regulation clarifies that all real estate agents and brokers who are not employees but operate as sole proprietors or owners of partnerships, S corporations, or limited liability companies are eligible for the new deduction. The new deduction can be up to 20 percent. This also includes those whose income exceeds the threshold of $157,500 for single filers and $315,000 for those filing a joint return.
- The rule simplifies the process that owners of rental real estate property must follow to claim the new deduction. The Tax Cuts and Jobs Act specifies that only income from a “trade or business” qualifies for the 20 percent deduction. But various court rulings and prior IRS guidance sparked confusion over which rental properties are investments and which could be considered a business enterprise. NAR urged the department and IRS to simplify the rule. The final regulations have since provided clarity through a safe harbor test that requires at least 250 hours per year spent on maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities.
- The final rules also provide clarity on situations where a person exchanges one parcel of real estate under Section 1031 for another parcel. The previous rules denied deduction eligibility, but the department and IRS have since recognized the initial ruling was misguided and have corrected and clarified its policy in its final guidance.
The biggest take-away from this ruling is that real estate professionals like us here at Hill Co. & Associates are now even better equipped to serve you in the best way possible. If you are ready to purchase or list a home or find your next investment property (at this new tax rate!), we would be thrilled to help you!