The regulations will benefit individuals, partnerships, S corporations, trusts and estates engaged in domestic trades or businesses.
A business income deduction is available for eligible taxpayers with pass-through real estate businesses. The 2017 tax reform bill brought about Section 199A, the 20 percent business income deduction. The IRS created deduction by way of the Tax Cuts and Jobs Act of 2017.
Almost any self-employed person or owner of a pass-through business (such as an S corporation, limited liability company, or partnership) with eligible income can take 20 percent off the top after business expenses are deducted. Taxpayers can take the deduction on their net qualified business income such as travel, car, office supplies, etc.
Taxpayers will take the deduction on an aggregate basis. More specifically, the 20 percent would come off the aggregate amount of income less qualified losses from other sources.
Real Estate Business Owners
Many of the residential investors may wish to form a Limited Liability Company (LLC) to protect their personal assets from creditors. Moreover, taxpayers can use a pass-through federal taxation on profits instead of being taxed by the government on the company level. Startup is relatively cheap as well. Click this link to learn how to form a LLC in the State of Mississippi. Also, you might be interested in the Tax Benefits for Businesses owning Real Estate.
To qualify, commercial real estate landlords under triple net lease contracts would need to prove active engagement. Commercial landlords would need to show continuous due diligence, negotiating, and buying and selling of properties. Regarding residential landlords, a similar level of active material participation of the landlord taxpayer would need to be evident.
Limits to the qualified business income deduction
If you file as an individual, you’re eligible up until your taxable income reaches $157,500. After that, your deduction phases out over the next $50,000, until you reach $207,000. For couples filing jointly, the taxable income limit is $315,000, with a $100,000 phase-out until you reach $415,000. That applies to your combined income. So, your spouse’s income can impact your eligibility.
Update: As of January 2019, the Treasury Department and the IRS issued final regulations allowing real estate professionals to use the Section 199A as a 20% pass-through deduction. In turn, this act will increase Realtor® operations and provided improved services to consumers. Read more here.
Talk to your CPA to see if you qualify!