Investing in real estate has been a staple of growing individual wealth forever, and thanks to the Tax Cuts and Jobs Act of 2017 (“TCJA”), investing in real estate for the purpose of gaining rental income has become an even better use of limited resources. This article will briefly address the impact of the TCJA in relation to the benefits it provides to individuals who are receiving income from rental properties.
(1) Deductions Equal Benjamins, And It’s All About the Benjamins (Baby)
Every owner of a rental property knows about the deductions connected to general deprecation in those properties, but under the TCJA, rental property owners can take an additional deduction during the first year that they have ownership of a rental property. Once upon a time, rental property owners could take a deduction that maxes out to ½ of the property’s total value, but under the TCJA, that cap could reach the full value of the property itself; provided it qualifies.
In order to qualify for the 100% cap, the property must have become available for rent, for the first time, after September 27, 2017, but before January 1, 2023.
(2) The Government Allows You to Have One-Fifth on Rental Income, Tax Free
Rental income is taxable income, there is no way around that; but one-fifth of that income is untaxed. Pursuant to §199A or the IRS Code, qualified business income can be deducted to a certain extent; historically however, there has been a significant amount of confusion surrounding what business income actually “qualifies” for deductions. The IRS has recently provided guidance on this issue by noting that income from rental properties “qualifies” for that business income deduction.
(3) What’s the Downside?
The only downside to the TCJA is that rental property owners now have a cap on claiming losses on their property (e.g., when costs exceed income on the property). Prior to the TCJA, owners of rental properties could claim limitless losses, while the TCJA caps those losses at either $250k for a single owner of a rental property, and $500k for owners who are married.
At the Chernov Team we understand that knowledge is power, we also understand that many people view real estate as an investment opportunity vis-à-vis rental property. Any skilled real estate agent has an obligation to understand all the nuances of real estate, and we take that obligation seriously. At the Chernov Team we know that whoever comes to the table most prepare leaves with the most, and the Chernov Team always leaves the table with the most.