Trump is putting together a new income tax bill, and it does affect homeowners and investors in different ways. Now, how does it do it? Well, you’re about to find out, for this article will go over those that need to know about this, and why it can affect you.
Now, the biggest loser is those that have rental income, since this is subject to the self employment tax. This is an amendment that defines that the net earnings from self employment is something that will be changed. The bill is purposing that rental income might be subject to the Medicare tax, which is a 15.3% tax. However, it’s not that simple, since it isn’t all rental income. First, you have to show that you get a positive taxable rental income in order for this to actually happen. If you don’t do this, you will also need to be doing this as a form of trade or business. However, the problem is, that “trade or business” isn’t in the tax code, and you have to look at this in the tax court. If you’re engaged in a trade or business, the taxpayer must be a part of the activity, and the purpose of this must be for income or profit.
Essentially, you need to be doing this as a real estate pro, participate in these activities, and invest in short-term rentals. If you do it passively, you might not be subject to this. So if you have long-term residents, or if you’re not doing this full time, then it shouldn’t affect you. It has a huge negative impact for real estate investors.
Probably the second biggest and one that should be known are itemized deductions. You won’t be able to deduct taxes from a state and local tax that you paid during that year, which is a huge itemized deductions. This is super costly in those that are high tax, but if you’re low tax, it’s less notifiable. However, this is now capped at 10K for the schedule A, which will hurt those that have a primary residence that’s at a high value, or who live with high property taxes.
Personal property taxes are now no longer deductible, and the interest is only deductible now to the first 500K. It does hurt those that have a primary home or a secondary property, not rental properties.
The final loser is the section 121 exclusion that’s harder to claim. Now, currently it allows you to exclude 250K/500K married of capital gains on your main residence, so long as you’ve lived there for at least two of the five years. However, you have to now live in the primary residence for the past five of eight years in order to qualify for this. However, there is no transition period, so if you do any sale after the first of 2018, it must be the new five of eight in order to get this. So, if you are going to sell your primary residence and get the capital gains without taxes, you need to do it now and hope that you sell before the year, and hope that this measurement does not pass.
Now, there are a few winners here. Essentially, the Alternative minimum tax is essentially eliminated, which makes rich Americans pay at least 28% of tax on their income. However, this impacts the middle class more than it does the rich, and it’s super difficult to actually calculate, and it adds more processing times and professional fees. It’s an inefficient thing and it doesn’t need to be there. Some LLCs as well will now have a 25% tax rate on their income. However, this is a complicated one to pass through, since it must have a specific excluded from this sort of thing for it to take effect.
This bill does a whole lot more harm than good to investors, and we can only hope that by this point, this bill doesn’t go through somehow. However, it’s important to know about, and something that everyone should be watchful over, since it’s one of the major bills that is being passed during the final quarter of the year.