Tax season has you feeling like you need a break? Well, if you are a real estate professional, then you’ve got it! Compliments of the Tax Cut and Jobs Act of December 2017, many real estate professionals may receive a tax break on their taxes, and may deduct 20% of their pass-through business’s net income through the qualified business income (“QBI”) deduction, under section 199A of the Internal Revenue Code.
In its simplest terms, the QBI deduction will allow real estate professionals, including business owners, real estate brokers, and certain real estate investors, to deduct 20% of their qualified business income for the tax years beginning January 1, 2018. QBI is the net amount of qualified items of income, gain, deduction, and loss for any qualified trade or business of the taxpayer. QBI does not include capital gains and losses, certain dividends, interest income, or the Taxpayer’s W-2 income.
The QBI deduction generally applies to taxable income that is at or below $315,000 for joint returns and $157,500 for other filers. Is your taxable income higher than this amount? All is not lost, because real estate professionals with incomes above these levels, may still be eligible for the deduction – subject to certain limitations and phase outs for high income earners. These limitations include, among other things, the type of trade or business and the amount of W-2 wages paid in the trade or business.
Example: In 2018, Rachel Realtor, had $100,000.00 of qualified business income from her LLC, and $20,000.00 of deductions, resulting in net taxable income of $80,000.00. Rachel’s QBI deduction will be $16,000.00, which is 20% of the $80,000.00 of taxable qualified business income that Rachel received from her LLC. The QBI deduction will reduce Rachel’s taxable income to $64,000.00.
The deduction applies to QBI from sole proprietorships, partnerships, S corporations, and certain trusts, or estates. The deduction is not available for wage or business income from C corporations. QBI is reduced by certain deductions for self-employed health insurance, self-employment tax, and retirement plan contributions that are attributable to a trade or business.
Don’t own or operate a real estate business, but you have real estate rental income? If your real estate investing rises to the level of a trade or business, then you are in luck. According to the newly released IRS regulations, real estate investment rentals will be considered qualified business income if the taxpayer:
1. maintains separate books and records for the business income;
2. spends 250 hours or more a year performing “rental services;” and
3. maintains time reports or time logs to show the hours spent on performing rental services each year.
Rental services include leasing, repairing, maintaining, and marketing property. The property owner, agents, independent contractors, or employees can provide the rental service.
If you are a real estate professional or have real estate rental income, you should speak with your CPA or Tax Attorney right away, or by the tax filing deadline of April 15, 2019, to see if your business income qualifies, or what steps you may need to take to qualify for or maximize the benefits of the new QBI deduction.
Berlin Patten Ebling, PLLC
Article Authored by Pamela Hernandez, Esq. firstname.lastname@example.org
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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