For those who may have been wondering how the final GOP Tax Bill could affect possible real estate investment plans and tax liability next year, the changes can be significant.
I know, I know. As soon as you saw “tax liability,” your eyes glossed over and your finger got ready to swipe right. But before you skip the following, I promise to keep it short, relevant, and potentially beneficial for investors and potential investors here in Morris County:
SIGNIFICANT fact #1:
You can now take 100% depreciation upfront for assets with useful lives of less than 20 years. For example, if you buy personal property (like carpet, new appliances, tools, equipment) or if you make land improvements (like landscaping, driveways, parking) you can probably immediately write off the entire cost of these assets. Under previous rules, the allowed depreciation was 50% in the year of purchase.
However, as www.BiggerPockets.com points out, “It is important to note that this is bonus depreciation. That means that when you sell the assets, you will pay depreciation recapture tax. Keep that in mind.”
SIGNIFICANT fact #2:
A new “freebie” deduction has been granted to sole proprietors, LLCs, and S corps generating qualified business income. According to www.Nolo.com, “Landlords are among the biggest winners under the new law. Virtually all landlords will save money–many, to quote our President, will save ‘bigly.’ Enjoy it while you can.”
So basically, if your rental activity qualifies as a business for tax purposes (as most do, according to Nolo), you may be eligible to deduct an amount equal to 20% of your net rental income. This would be in addition to all your other rental or real estate investment-related deductions. If you qualify for this deduction, you’ll effectively be taxed on only 80% of your rental income. Thus, the effective rate for taxpayers in the top 37% tax bracket is 29.5%.
Now, as a licensed New Jersey real estate agent, my E&O insurance (and common sense!) dictate that I remind you that I am not a tax professional and do not dispense tax advice. All tax matters should be directed to your accountant – especially in light of all the recent tax code changes. However, my investor clients here in Morris County—as well as anyone considering purchasing their first real estate investment—would be well served by consulting their tax advisor regarding possible moves they might make in the second half of 2018. The results next April 15th could be significant. And as always, for any real estate purchase, investment or rental considerations – give me a call anytime!