Many people think that real estate suffered with the recent tax changes – most notably the elimination of moving expense deductions, the reduction in the mortgage interest deduction ability, the $10,000 state and local tax cap on deductions…all of these will make it harder for some property owners. But the good news is that there are some other rules, either new or that escaped cuts, which will help real estate owners and those who work in the industry:
• Second home mortgage interest can still be deducted (that benefit was almost lost)
• 1031 tax rules were kept (they were supposed to be cut), allowing investors to defer capital gains taxes when purchasing a replacement investment property
• The ability to rent a primary or secondary home for up to 14 days a year, without paying taxes on the income
• A new deduction for pass-through entities (especially REITs), which allows real estate partnerships and LLCs a 20% deduction.
• Real estate industry professionals working more than 750 hours a year can still deduct their real estate losses from ordinary income, and lower income investors can still deduct passive income (like real estate rentals).
• Real estate agents are exempt from limits in their pass-through deductions if their annual income exceeds $207,500. The rationale behind this is that real estate professionals are not considered service providers (like lawyers or doctors)…which seems silly (what does the government think we do if not provide services?), but at least industry professionals can benefit from this rule.
• Property and land depreciation rules were retained, but with a shortened residential property period. In the US our accounting rules see real estate as something that loses value, but in many areas right now around the country property values are rising, so investors can continue to invest in real estate knowing they can deduct the depreciation.
• Businesses are allowed to annually deduct up to $1 million on certain types of qualifying property expenses, which is double what the old rules allowed.
• The carried interest deduction rules have been changed – instead of one year assets must now be held for three. This will help real estate funds.