Tax Cut and Jobs Act – Impact on Property Owners
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by Tom Lisy, RPBG Director
Lisy Rentals - February, 2018
The recently passed Tax Cut and Jobs Act, signed into law on December 22, 2017, contains changes of major importance to all members of the Rogers Park Builders Group. The impact of these changes will vary greatly among members of our group, based on the organizational structure of their business, amount of property owned, number of employees (if any) and total taxable income of the individual business owner. Although it will take some time before tax professionals are able to assess the total impact of the new law on their clients, we can provide this brief synopsis of the major details that will affect us all:
Tax Reduction
Businesses that are organized as corporations will see a dramatic reduction in their tax rate from 35% to 21%. Business that are organized in a way that treats their taxable income as personal income (pass-through) will probably see a reduction in their tax rate resulting from the consolidation of tax brackets
State and Local Taxes (SALT) / Mortgage Interest
Personal deductions for these items are now limited to $10,000 ($5,000 for a married taxpayer filing jointly). This includes taxes paid on real estate, personal property and either income or sales taxes.
Capital Gains
The top capital gains bracket remains at 23.8% (20% plus 3.8% net investment income tax).
Itemized Deductions
The overall limit on personal itemized deductions is repealed. (This item in the new tax law will sunset in 2025.)
Pass-Through Income Deduction
Businesses that are organized as sole proprietorships, “S” Corporations, partnerships and LLCs whose profits are treated as personal income for tax purposes are eligible for a maximum deduction of 20% of taxable income. This deduction is applicable up to an income threshold of $157,500 for single filers and twice that for joint filers. The formula for this deduction is as follows:
Deduct 25% of wages paid to employees plus 2.5% of the purchase price (unadjusted basis) of tangible depreciable property (“qualified property”).
According to Robb Mandelbaum of Forbes magazine, “qualified property is anything the business has bought and is still using. The law allows owners to factor that piece of property, whether it’s an office building or a desk in that office building, into the deduction for as long as it can be depreciated, but for at least 10 years.” It may be important to note that vacant land is not considered qualified property.
In addition, the pass-through income deduction is not available to “specified service trades or businesses.” These are defined in the new law as investment services, as well as those "in the fields of health, law, consulting, athletics, financial services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” Only time will tell how this clause is ultimately interpreted.
Businesses with multiple owners will split the pass-through income deduction, based upon their accountant’s determination of ownership percentages. However, individuals with taxable income below $157,500 and joint filers below $315,000 (anyone in the new 24% bracket or lower) are exempt from both the limitation based on wages or capital and the restrictions on professional services. The limitations phase in over the next $50,000 of taxable income (for example, no deduction after single filer income of $207,500).
Conclusion: Generally, the real estate professionals who fare the best from the new tax law will be those who have large amounts of property and a significant number of employees. Since many of our members do not fit this description, the greatest benefit of this new law to most RPBG members will be the reduction in individual tax brackets. Also, if there is a surge in the overall economy brought about by the law, it should “lift all boats.” Potential renters may feel they have a little more money in their pocket, thus supporting current or higher rental costs.
Other details of the new law, such as accelerated depreciation, sunset dates of various provisions and changes to the Alternative Minimum Tax (which are too complicated to discuss in this short article) may also affect some members. As always, consult your tax professional for specific interpretation of how the details of the Tax Cut and Jobs Act affect you and your business.
