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Real Estate Investors Filing Taxes Overlook These Changes in Tax Code

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In the business world, the rearview mirror is always clearer than the windshield.

– Warren Buffett

Hindsight may be 20/20 but for real estate property owners and investors, it isn’t good enough. If you’re listening to the chatter on social media and many news sources, the verdict on the new tax laws isn’t all that rosy. Is it based on reality or confusion surrounding the Tax Cuts and Jobs Act (TCJA)? We thought we’d talk to a local expert on taxes and how they affect real estate rental owners to help disseminate between the muck, the money, and the best ways to maneuver around the melodrama. Jennifer Johnson, owner of Perfect T Accounting on Mesa, Arizona provides some insights. Here’s how the changes in 2018 tax code line items could affect you during this filing and for years to come.

Write Offs Are Still On

The changes to residential property owners and the amounts available for mortgage interest and property tax write-offs do not apply to rental property owners. And it’s not a bad thing. Commercial property owners will still receive the same tax benefits as before the new tax code went into effect.

All the same standard write-offs you came to know, love and experience with owning residential rental property still exist including utilities, repairs and maintenance, yard care and maintenance, insurance, association fees (if applicable) and depreciation. But there is a caveat here.

SALT Deduction Can Sting

If you have rental property and also live on the property (i.e. duplex, triplex or other multi-unit properties), you will have to succumb to the new tax law modifications, which limits your property tax write-off at $10,000.

If that doesn’t sting enough, property tax write-offs now fall under what is known as the SALT deduction. Property taxes are just one element of SALT, which is comprised of state and local taxes. Within SALT the numbers will add up more quickly because it includes property taxes, and income tax or sales tax.

Arizona property owners continue to enjoy the benefits of categorically low taxes, compared to other states, perhaps offering a buffer to the impact of SALT.

The Floodgates Opened Up for Section 179 Deduction Guidelines

Maintenance and depreciation on a property are normally taken over time during ownership. But the Section 179 deduction allows property owners to completely expense an asset in a single year”, explains Jennifer Johnson. “Maintenance and repairs are normally expensed on the profit and loss statement of a business. However, major upgrades can be considered an asset and added to the depreciation schedule. For example, new flooring for a building would be considered an upgrade. This would be added to the depreciation schedule by using the 179 deduction. Just make sure this is in the best interest of the business financials for that year.”

Not every commercial property owner will stay within these income limits. There are actions that can be taken in these circumstances. Johnson details the options. “If a taxpayer goes over the limitation, they may want to lower their income by moving property ownership to one of their other businesses, move funds to trusts or pension plans, charitable donations, and use the 179 deduction or bonus depreciation.

2X The Bonus Depreciation

Good news for those with qualifying properties that meet the guidelines for taking bonus depreciation within the first year, instead of drawing depreciation out over the course of property ownership. In fact, as long as the property was placed in service after Sept. 27, 2017, and before Jan. 1, 2023, bonus depreciation jumps from 50 percent to 100 percent, if taken in total within the first year. For property

acquired prior to September 28, 2017, and placed in service before January. 1, 2018, bonus depreciation stands at 50 percent.

To meet the criteria, your subject property must provide for all of the following:

  • Taxpayer’s property acquisition was not in any way due to a family relative.
  • Taxpayer did not use the subject property before owning it.
  • The person who sold the property to the taxpayer did not use the property before owning it.
  • Taxpayer didn’t obtain the property through a member of a controlled group of corporations:
    • Brother-sister group
    • Parent-subsidiary group
    • In combination of the above groups
  • Tax basis of property is not configured through adjusted property basis, from seller or transferor
  • Tax basis of property is not configured based on acquisition from a descendant
  • The cost of the property doesn’t include basis of eligibility due to other property ownership held by taxpayer at any time

New to the Bonus Qualifiers

Entertainment industry players have now received an affirmative nod for their ventures. The TCJA now includes film, television and live theatrical production assets as a new type of qualifying property that could take advantage of the new 100 percent bonus depreciation, though all the criteria must be met to be deemed as a ‘qualifying’ property.

Tax Loss, PALS and Carryforwards

If you own more than one rental property, chances are you’ve experienced a tax loss, unless you purchased the property with equity built in, have minimal-to-none vacancy rates, minimal deferred maintenance to deal with, or have owned the property for quite some time.

Otherwise, you likely look forward to exercising your rights under PAL (passive activity loss) provisions. This allows you to deduct losses from a rental property as long as you have either sold the property that generated the losses or receive enough passive income from other sources to help offset the loss.

Here’s how it works now:

  • Current year business loss can offset up to $250,000* of income from other sources**
  • Above stipulation is applied after meeting the PAL rules
  • Married taxpayers can go up to $500,000 of other income **Other income includes self-employment income, salaries, interest, dividends, and capital gains

While net operating loss (NOL) carryforwards were allowable for a two-year carryback and a 20-year carry forward, 2018 tax filings will see a change. “Now net operating losses can only offset 80 percent of taxable income in any given tax year but they can no longer be carried back. It can, however, be carried forward any number of years. With these changes, a careful look at a company’s income for the past few years should be considered. Revisions cannot usually be made when a company elects to carry forward or back, but a revision to this rule allows you to revisit tax returns from 2014 to 2017 to assess whether amending those filings is warranted.”

Like-Kind Isn’t Personal Anymore

Many businesses utilize 1031 exchanges as a way to not only acquire new property, replacing sold property with like-kind property as a means to defer tax liabilities, but also in the acquisition of new equipment, deemed personal property.

For example, let’s say the owner of a landscape architect business also had a crew that would handle the design, development and planting of landscapes in addition to the maintenance of them. As such, the owner may own real property as his business headquarters but also own personal property as in a fleet of trucks for the staff.

Before the new tax code, he could sell his business real property and include the fleet of vehicles, and upgrade his properties (both structures, land AND vehicles) by purchasing another business through a 1031 exchange for real and personal property.

But this year, due to the changes in 2018 tax code, personal property can no longer be included in an exchange. There are exclusions to this if one part of a personal property exchange was exercised before December 31, 2017 but other parts of the same deal were not.

For all matters related to 1031 exchanges, both real and personal properties, it is best to consult with your real estate and financial advisors.

Don’t Pass Over the Pass Throughs

Good news on this! The tax you pay on real estate investment income has shifted in your favor. Johnson said, “The new 20 percent deduction applies to service businesses as well, for pass through entities, such as S-corps, partnerships and LLCs. But the IRS has a phase out of this deduction for couples whose qualified business income hits $415,000 (married and filing jointly); and $207,500 for single filers (or married filing separate). One more thing, if you are in a business partnership, divide the qualified income by two to figure the actual portion of income to be applied for that business owner.”

Professional Advice from Industry Experts Is Second to None

Like any business, there are knowledgeable people skilled at what they practice. Not every real estate property owner is an expert in all matters of the business, especially when it comes to the financial aspects and tax law. One wrong move based on misinformation and it could set you back.

Before you decide to buy, sell or renovate commercial property, check in with your trusted real estate broker, financial advisor and CPA to come up with the right course of action for you and your business. Consult with a Commercial Real Estate Professional Now

The First Quarter Is the Best Time to Reevaluate Real Estate Needs

The First Quarter Is the Best Time to Reevaluate Real Estate Needs

Fresh starts to your new year should go beyond unfulfilled resolutions about diet and exercise. To really get ahead on improving your life, start with taking a long, hard look at your current commercial property portfolio. Is it performing to expectation or falling short? Having to assess your holdings isn’t easy, in fact; it could be painful, especially if getting a grip on reality has been put on pause for the past year. So set some time aside for this reality check. Grab a pen, paper or your favorite screen and keyboard because you’ll want to take some notes. First quarter 2019 is the right time to revisit your real estate and design a game plan that meets your goals.

Real Vision Supersedes Blind Ambition

We’ve all done this. Investors and real estate brokers alike – boasting about the deal they got on a property purchase. In fact, we love to retell that story as often as possible, even when enough time has passed deeming it old news. But if your real estate holdings are truly screaming “What have you done for me lately,” it might be time for a change.

Did the market change? Did the market value change? Did the rent roll take a nosedive instead of an increase? Did your property management company raise their rates or provide lackluster service? These are just some of the many questions you should be asking yourself when reevaluating your real estate as they all affect the financial balance that defines whether keeping real estate or obtaining more is worth the risk.

Put emotions and stress aside. It’s time to establish the next steps.

Real Estate Holdings Game Plan for First Quarter 2019

Most people engage in acquiring commercial property as the means to increase their worth through somewhat passive income (somewhat because it can require hands on attentiveness in dealing with tenants) and increasing value which, over time, equates to equity. However, things can happen beyond your control that can make a solid plan turn sour.

  • Did you have a life event happen that affected financial security or overall asset value?
  • Are there unexpected financial obligations that put more stress on monthly expenses?
  • Do you have enough cushion to withstand any of the following, should it take place over the course of this year:
    • Job or business loss
    • Real estate market value downturn (10%) of your holdings
    • High-end property maintenance expenses such as HVAC, roof or structural repair or replacement
    • Increase in vacancies (more than 25%)
    • Geographic plight (decay of neighborhood or area of property location)

Time changes everything, for the good and not so much. This is why it’s crucial to review commercial property value (perceived, intrinsic and potential) in the first quarter each year to allow for adjustments to be made with minimal consequences.

For example, if after assessing your personal situation and weighing the strain that real estate may be putting on you and overall goals, you decide that the time may be right to sell the property and reallocate some or all of the gain into other property(s), there’s still time to entertain a 1031 exchange.

Revisiting Rents

It’s important to keep a constant watch on what current rental rates are within a mile or two in proximity of your subject property and classification. As supply wanes, and demand increases, you could be missing out on additional income when current leases are set to expire. This can also be a sticking point in negotiations that can go in your favor, should your tenants want to discuss a relocation or tenant improvements.

The Meeting of Both Minds

Time has a strange way of changing our perspective. If you’ve been in real estate for some time, chances are, you like a good challenge with an upside. But there’s often a cost, which has little to do with money.

The price of owning real estate can bury a person’s mental health. What seemed worth the risk of one’s psychological wellbeing at 45 years of age can seem very different at 62 years young. The financial gain, each year, may not be worth the headache. Diversification of portfolio could be appearing as the best option. For those who own real estate, say a handful of small properties, and self-manage and/or take care of the maintenance and repairs needed on site, relief may not necessarily come in the sale or reallocation of assets but in hiring a third party to take the burden off, and free up time to be able to enjoy life more.

Eyes Wide Open for Today’s Real Estate Opportunities

Commercial property investing has embedded itself into the digital marketplace. It’s easier than ever to get a piece of real estate ownership, without the overriding stress than accompanies the responsibility.

Many people new to real estate investing are getting involved in REITs or crowdfunding for real estate. REITs allow you to buy shares of real estate, similar to how you purchase stocks. If you buy low and sell high… you know the rest. The types of REITs are based on rental properties (residential and commercial) or mortgage debt.

Crowdfunding real estate provides the perfect vehicle for the small investor to step into bigger shoes, sharing the risks exponentially. Like REITs, crowdfunding real estate comes in two options: equity or debt based investments. Crowdfunding of properties has only been available to the larger public since 2015, leaving success rate analysis scant. The key here is the longer the hold, the more likely the profit, especially with the equity crowdfunding.

Agility Is the Smorgasbord of 2019 Investing

As we’ve seen in the stock market this year, anything can happen. Because financial news travels in the blink of a click or swipe and can live online forever, accuracy in discovering what’s real and what’s perception can sway markets easily. The new focus in investing is honing the ability to jump from one trend to another without losing your shirt. Not the challenge that many property owners prefer but, according to Deloitte®, “Realign business priorities and adapt to new demands. The most agile will win away customers and top talent—along with investment dollars.”

Get Out From the Old and Into the New

Think of the first quarter of 2019 as your commercial property wake up call. Dust off your old ways of thinking and be open to lines of opportunity that could minimize time vested, and expand cash flow and long term gain. COBE Real Estate brokers, agents and property managers can help give you a refresh on your current portfolio and provide recommendations to help you achieve your goals for this year and into the future.

Fresh Starts in Real Estate Investment Success Happen Here