The Tax Cuts and Jobs Act officially went into effect last year, and landlords and property owners are among its biggest beneficiaries. Not sure what to expect this tax season? That’s where we come in. Read on for a breakdown of how the new tax laws will affect your filing this year.
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Mortgage Deductions, Write-Offs and Capital Gain Tax Rates Remain Unchanged
The Tax Cuts and Jobs Act (TCJA) sets forth new limitations on personal residence mortgage deductions. Luckily for you, these limitations don’t apply to rental properties (unless you use the property for personal purposes). That means that if your property’s sole purpose is strictly to be a rental, you won’t need to worry about the new limitations and your deductions will remain the same.
Long term capital gains tax rates also remain the same as those from the years before. In addition, you can still write off most of the expenses for your property including:
- Utilities
- Insurance
- Home association fees
- Repairs and maintenance
Section 179
The TCJA made increases to the maximum Section 179 deduction. This allows rental owners to deduct, in one year, the cost of personal property used in their rental business, such as furniture and appliances. Up until 2018, Section 179 was unavailable for landlords and rental property owners, but the TCJA has eliminated that restriction. Landlords can take advantage of this deduction for up to $1 million when filing this year’s taxes.
Something to note: These deductions can neither create nor increase an overall tax loss from business activities. You’ll need plenty of positive business taxable income to take full advantage of this tax break.
New Pass-Through Deduction
Perhaps the biggest and most beneficial change from the TCJA is the new pass-through deduction. TL;DR: any profit earned from a rental is “passed through” to the owner and they pay tax on it at their individual income tax rate. Qualifying business owners and landlords can then deduct from their income taxes up to 20% of their net business (rental) income.
No Self-Employment Taxes
Although an early version of the TCJA initially sought to make real estate owners pay self-employment taxes, the final version dropped them from such requirements. That means landlords are still exempt from paying self-employment taxes, including Medicare and Social Security taxes, on their rental income.
The one stipulation is for property owners who provide personal services to renters. Those who essentially run a Bed and Breakfast or a hotel-style property are still required to pay self-employment taxes. Normal landlords and property owners, though, are exempt.
Loss Disallowance
You can no longer deduct an excess business loss ($250,000 for singles, $500,000 for joint-filers) in the current year. Any excess loss is carried over to the next tax year and can be deducted under the rules for NOL (Net Operating Loss) carryovers. Keep in mind that this new loss disallowance is only applicable to those who have already made it past the PAL rules.
The new tax laws provide a little more wiggle room for landlords and property owners to receive certain deductions and avoid self-employment taxes. It’s best to speak to your tax advisor about all the changes the new tax laws have created, and discuss how they can benefit you as a landlord. Ready to rent your property? Try Zumper Pro, where you can list your property, screen tenants, and fill your vacancy all in one place.
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