Real estate professionals are lauding a ruling from the U.S. Treasury Department that enables them to enjoy a valuable tax deduction.
The Treasury and IRS recently issued their final regulations regarding the qualified business income rule within the 2017 Tax Cuts and Jobs Act. The new regulations provide more clarity to real estate professionals as well as offer them a 20 percent deduction as a pass-through business entity.
The National Association of Realtors called the ruling a “significant victory” for real estate professionals.
“The finalized ruling … represents a tremendous win for real estate professionals across the country,” said Shannon McGahn, NAR senior vice president of government affairs. “We are thrilled to see our members emerge from this process so favorably … and for ensuring consistency and clarity within these policies.”
The 2017 Tax Cuts and Jobs Act primary mission was to shrink the corporate tax rate, lowering it from 35 to 21 percent. About 90 percent of U.S. businesses, however, are pass-through entities rather than corporations, making the policy less beneficial for most business owners, including real estate investors. The section 199A provision now enables tax deductions for small businesses and self-employed independent contractors.
Here are three key provisions the National Association of Realtors highlighted within the IRS and Treasury Department’s ruling that applies to real estate professionals.
- “The regulation clarifies that all real estate agents and brokers who are not employees but operate as sole proprietors or owners of partnerships, S corporations, or limited liability companies are eligible for the new deduction. The new deduction can be up to 20 percent. This also includes those whose income exceeds the threshold of $157,500 for single filers and $315,000 for those filing a joint return.”
- “The rule simplifies the process that owners of rental real estate property must follow to claim the new deduction. The Tax Cuts and Jobs Act specifies that only income from a “trade or business” qualifies for the 20 percent deduction. But various court rulings and prior IRS guidance sparked confusion over which rental properties are investments and which could be considered a business enterprise. NAR urged the department and IRS to simplify the rule. The final regulations have since provided clarity through a safe harbor test that requires at least 250 hours per year spent on maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities.”
- “The final rules also provide clarity on situations where a person exchanges one parcel of real estate under Section 1031 for another parcel. The previous rules denied deduction eligibility, but the department and IRS have since recognized the initial ruling was misguided and have corrected and clarified its policy in its final guidance.”