Not surprisingly, the GOP tax plan has dominated the news in recent months. (After all, it’s the biggest overhaul of the tax code in three decades.) Signed into law on Friday, December 22, 2017, the tax plan has many Americans skeptical. In a nutshell, corporations will save lots of money, and most households will see temporary savings.
That said, landlords are expected to reap significant benefits from the new legislation, thanks to the pass-through deduction. This change increases the profitability of income-generating real estate, like apartment buildings.
Here’s how it works.
The tax plan and the pass-through deduction
The plan will allow real estate investors with pass-through companies to deduct 20% of their taxable income. This type of corporate structure, which includes S corporations and limited liability companies (LLCs), eliminates double taxation. Instead of paying corporate income tax, income passes through to the owner(s), who pay personal taxes on the total. Pass-through entities are especially popular with small businesses, including owners of small buildings in the New York City area.
The most generous deductions apply to couples with taxable income below $315,000 and to singles whose income falls below $157,500. Other deductions are available, including for joint filers with annual taxable income that exceeds $415,000 ($207,500 for singles), subject to limitations.
Consult the tax and legal experts
If you already operate as a pass-through entity, you’ll likely see some nice tax savings. If not, the new tax plan offers yet another reason to speak with tax and legal advisors about the best way to structure your business. Besides, the sheer scope of the changes means that you’ll likely be consulting these advisors in the immediate future if you haven’t already.
Just remember: If you change the ownership structure—or make other changes to your property—contact your insurance broker. We’ve seen a number of problems arise from claims where the name on the building deed doesn’t match the insurance policy.