Maximizing Tax Savings as a Real Estate Investor with the 2018 Tax Law

As a real estate investor, you have numerous strategies to enhance your savings, but your setup largely determines which options are available to you. The 2018 tax law brings significant changes that could significantly impact your tax burden. Understanding these changes can help you save more effectively.

How Will the New Tax Reform Laws Affect Real Estate Investors?

The new tax laws aren't particularly favorable to homeowners, but the business-friendly approach benefits real estate investors. Under the current tax system, real estate investors often pay substantial taxes on rental and flip incomes as ordinary income. This means that the highest tax bracket, currently 39.6%, would apply to these types of income, leading to higher tax rates based on the amount of income generated.

For many real estate investors, operating through LLCs or S corporations is standard practice to separate personal and business profits. In these structures, income passes through the corporation to the individual, which can result in higher tax rates due to the highest bracket rule. This structure typically means that such individuals could be in the highest tax bracket, paying rates nearer to 39.6%.

However, the newly proposed changes in both the House and Senate bills have promising implications for pass-through income. The current tax rates for pass-through income are set to be reduced drastically. In both bills, the pass-through income tax rate is proposed to be 25%, a substantial drop from the 39.6% or even potentially over 38%, depending on the highest bracket post-reform. These changes are particularly beneficial for those with rental properties or recently flipped homes and could save significant amounts of money. My own real estate flips, with 18 currently ongoing, could result in savings of hundreds of thousands of dollars in the next couple of years.

Despite these promising changes, it's worth noting that not all changes are implemented immediately. Some restrictions or conditions may be in place, particularly for those over certain income thresholds in the Senate bill.

Understanding the 20% Pass-Through Entity Deduction

One significant provision of the final tax bill is a 20% deduction for pass-through entities. This could mean a considerable reduction in your tax bill, as much as 20% less than you currently pay. However, several conditions apply to this provision:

Service industry is excluded from this rule, and therefore would not benefit from the deduction. This may affect real estate agents but likely not flippers or landlords. The deduction amount is based on the lower of either 20% of your business income, 50% of your W-2 employees' wages, or 25% of your W-2 employees' wages and 2.5% of your non-W-2 business expenses.

Understanding these restrictions and conditions is crucial for maximizing your savings. Consulting with a financial advisor or tax professional is highly recommended to navigate the specifics of these changes effectively.

In summary, the 2018 tax law brings exciting opportunities for real estate investors. By leveraging the benefits of pass-through entities and understanding the reductions in tax rates, you can significantly improve your financial situation and elevate your business to new heights. Stay informed, stay proactive, and embrace these changes to enhance your real estate investment strategy.