The tax reform bill, titled the Tax Cuts and Jobs Act, has passed through Congress and is therefore on its way to the President’s desk. There have been many discussions about how the bill will negatively impact the average homeowner. However, investment property owners benefit from the tax reform bill in a few ways.
Pass Through Entities vs. Landlords
If you own property via a pass through entity, then your tax rate will be lower than it was in the past. Examples of pass through business entities are partnerships, limited liability companies (LLC’s), real estate investment trusts, and S Corporations. Income for these entities are passed through to its owners. It’s therefore “passive income.” Under the tax reform bill, individual owners may deduct 20% of their pass through income on their individual tax returns.
Landlord Small Business Owners
Business with only a few employees are getting a break as well. Owners can select from two alternative deduction methods:
- 50% of all W-2 Wages
- 25% of W-2 wages and 2.5% of the cost basis (unadjusted, after purchase) of qualified property
For both passive and active income, it is important to consult with a tax professional to understand the specific rules and discuss ways to optimize your tax returns. The above is just a quick summary of the changes and should not be interpreted as tax advice or comprehensive coverage of the new tax laws.
Every year, owners of investment properties apply depreciation to the property that they own. In the past, that depreciation was calculated based on 27.5 years for residential properties. Commercial properties were depreciated over 39 years. Both of these have been reduced to 25 years. This allows you to take a larger depreciation on investment properties.
Mortgage Interest Deduction
Normal property owners will be limited in how much mortgage interest they may deduct from taxable income. They may only deduct interest that applies to $750,000 of their mortgage. Fortunately, this does not apply to investment property owners. Investment property owners may continue to deduct the full amount of mortgage interest paid each year.
Investment Property Owners Benefit from the Tax Reform Bill – Will This Increase Investment Purchases in Massachusetts?
As you can see from the summary above, investment property owners continue to have incentives to buy and invest. Will this increase the demand for investment properties in Massachusetts? The multi-family market has always been pretty strong in MA and will probably continue to be so in light of the tax reform.
Reminder of Disclaimer: The above is strictly a general overview of tax changes and the potential impact on investment property owners. Every individual and business entity is different and may therefore be impacted differently by the tax reform bill. It is important to consult with your accountant regarding the specific changes to your individual tax returns.