If you’re still relatively new to real estate investing — or perhaps still considering it — one of the key questions you likely have is what tax benefits it may have for you. The tax code can be extremely complicated — particularly when it comes to real estate transactions. Therefore, it’s always wise to consult with your tax professional about the potential tax implications of any investment decision.
Being able to write off depreciation has always been one of the most notable benefits of investing in real estate. The Tax Cuts and Jobs Act (TCJA), which was passed by Congress and signed in to law at the end of 2017, included some changes regarding depreciation.
Lawmakers intended to allow 100% depreciation in the first year for a qualified improvement property (QIP). QIP is defined as a property where improvements were made to the interior of a nonresidential property.
While that language never made it in to the law as intended, it was corrected in the recent Coronavirus Aid, Relief and Economic Security (CARES) Act. That legislation contains language that represents the change as it was meant to be. It’s in effect through the end of 2022. It’s also retroactive to 2018, so taxpayers can amend their tax returns for 2018 and/or 2019 if necessary.
Taking that bonus depreciation in the first year — also known as Section 179 depreciation based on where it is in the Internal Revenue Code (IRC) — may or may not be in your best interest. It’s important to discuss it with your tax professional.
Section 179 Real Estate Deductions
The TCJA nearly doubled the maximum deduction for qualifying assets that were placed in to service beginning in 2018 to $1 million. That amount has increased in the years since, to $1.02 million for tax year 2019 and $1.04 million in tax year 2020.
Qualified Business Income (QBI) Deductions
With the TCJA, certain businesses, including sole proprietorships and partnerships, that are considered “pass-through” entities can deduct up to 20% of their QBI as well as 20% of dividends from a qualified real estate investment trust (REIT) and income from a qualified publicly traded partnership (PTP). So can some trusts and estates. This is also known as a Section 199A deduction, after its section of the IRC.
Qualified Opportunity Zones
The TCJA created something called Qualified Opportunity Zones. The purpose is to incentivize developers to invest capital and create jobs in areas that are struggling financially. Those who invest in real estate in these areas may be able to defer their tax liability on capital gains from their investments.
A final word about the TCJA: It “sunsets” at the end of 2025, which means that most of the provisions in it will expire then. Some are scheduled to expire earlier. Congress will determine what, if any, provisions to make permanent. That’s something to consider before making any long-term financial decisions of any kind based on that law.
Partner with Real Estate Investment Professionals
Just as it’s wise to rely on the knowledge and experience of a tax professional, you shouldn’t go it alone when it comes to real estate investing. Private real estate investment firms know the real estate market and study socioeconomic, demographic and industry trends to help determine where the market is headed. By pooling their clients’ investments, they can take advantage of opportunities that aren’t available to individual investors. Further, their involvement in the ongoing management of these properties helps ensure their success and profitability.
For more information about how the investment professionals at Realty Capital Partners (RCP) can help you, call us at (469) 533-4000 or email us at email@example.com.