The Crucial Tax Changes for Real Estate Investors
A good article outlining some of the implications of tax reform pertaining to real estate investors. As always, the best source to converse with (and have your questions answered) is your trusted CPA.
Unpacking The New Tax Reform: Crucial Changes For Real Estate Investors
BY Noel Christopher
Since the recently passed Tax Cuts and Jobs Act (TCJA) went through last December, real estate investors — including many of my own clients — have been rushing to make sense of it all. In what represents the most sweeping U.S. tax reform since the Tax Reform Act of 1986, many of the changes are set to have a significant impact on businesses and individuals alike.
Take, for example, the new 20% deduction that’s available on pass-through income for sole proprietors and LLCs. Or the higher 100% bonus depreciation allowance on the purchase of business assets. Despite the fact that this act contains some complicated areas, the good news is that generally speaking, business will most likely benefit from it — and that includes many real estate investors.
Of course, keep in mind that currently, many of these changes are temporary and set to revert by January 1, 2026, although there has been some talk of making some of the provisions permanent. While it may not be wise to restructure all of your investments solely for the purpose of tax breaks, it’s certainly a good idea to pay attention to the changes and consult with a CPA to find out how you can benefit most.
Income Tax Rate Reductions
For most taxpayers, there’s reason to rejoice: The new tax bill spells out lower tax rates across most tax brackets in a move that’s expected to total $1.2 trillion over the course of ten years.
While the income brackets themselves remain the same, most of the tax rates are slightly lower. Prior to the changes, the tax brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The new tax rate breakdown is as follows:
Rate: Filing Individually Taxable Income Over: Married Filing Jointly Taxable Income Over:
10% $0 $0
12% $9,525 $19,050
22% $38,700 $77,400
24% $82,500 $165,000
32% $157,500 $315,000
35% $200,000 $400,000
37% $500,000 $600,000
The second piece of legislation that’s likely to have a significant impact on real estate investors is the new 20% deduction on pass-through income for business other than C-corporations. This includes sole proprietors, LLCs and S-corporations. With these entities, the company itself doesn’t pay taxes. Instead, it’s passed through to the owner. For landlords and property investors, who often structure their investments as LLCs, this provision could represent significant savings.
Still, it’s important to note that for single-filer taxpayers with over $157,500 in adjusted gross income (AGI) and those who are married filing jointly with over $315,000, there may be limitations on claiming the full 20% deduction.
Other Deduction Changes
There have been a number of important changes to other deductions as well.
In one change, the personal exemption allowance has been eliminated. Filers were previously able to deduct $4,150 for both themselves, their spouse and dependents, but these deductions have now been repealed. But while this deduction is gone, the standard deduction amount has increased, nearly doubling to $12,000 for single filers and $24,000 for married filers.
Another change is the lower limits to mortgage interest deductions. Under the new law, mortgage interest is now only deductible on the first $750,000 on primary and secondary residences, although there is a grandfather clause that allows interest on previously purchased residences to be deducted up to $1 million. Also, interest on home equity loans is now only able to be deducted if the money was used for home improvements.
Additionally, state and local tax deductions, while unlimited before, are now capped at $10,000. Of course, investors and residents in states with high income taxes will feel this change the most.
Finally, for businesses with gross receipts of over $25 million, the net interest expense deduction will also now be limited to 30% of earnings before interest, taxes, depreciation and amortization.
Lifetime Gift Exclusion
Investors take note: The lifetime gift exclusion has doubled. The amount of an estate that can be transferred without federal tax penalty is now $11.2 million per person or $22.4 million for a couple. Just keep in mind that this change, along with many of the other amendments, is set to revert in 2025, so if you’re thinking of generously gifting a large portion of your estate to beneficiaries, it may be an idea to consider doing so sooner rather than later to take advantage of these higher limits.
100% Bonus Depreciation
While previously, business owners were able to deduct up to 50% of the cost of assets that they purchased for their business in one year, this amount has now increased to 100%. Starting in 2023, however, the amount of bonus depreciation that you can claim will be reduced by 20% every year.
While the long-term implications of this bill are yet to be seen, for now, many of the changes seem poised to directly benefit professional real estate investors — especially those who buy property under LLCs. Although with state and income tax deductions now capped at $10,000, there may be fewer incentives for investors to buy property in states with high local taxes like New York, California and Maryland.
It’s also important to note that most of these changes are set to revert January 1, 2026, so any investment planning or restructuring should be done with this in mind.
As always, and especially in light of the recent changes, it’s a good idea to consult with a financial advisor to see what you can do to lower your tax bill and structure your portfolio in a way that’s financially prudent.