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TAX REFORM SUCCESS GUIDE FOR REAL ESTATE AGENTS

Posted by Diane Brennan on Saturday, January 20th, 2018 at 5:14pm.

By Adam Fenner

FOR REAL ESTATE AGENTS

Unreimbursed Employee Expenses Once a favorite section to capture additional deductions for those who itemized their deductions in order to capture more than the standard deduction would allow. These have been completely eliminated. This is where agents need to act more strategically, and start operating with those expenses in mind. As compared with previous years where the deductions were often only considered at tax time. 

The two big favorites for agents have been mileage and home office deductions. These are both eliminated. These deductions have been eliminated from the personal tax return, not for businesses. This has been done to simplify the individual returns. In the past these deductions increased complexity of the tax return, increased the audit risk, and increased the cost of tax preparation. In exchange for the loss of these deductions the standard deduction has been nearly doubled. Additionally, the tax rates at each level have been reduced. In the next section we will talk more about the benefits, and then strategy. This year will require a change in behavior, which may be challenging, but if done right it could be your best tax year yet. 

Tax Rate Reduction Overall the tax rate tables have been reduced. This will help everyone, regardless of tax bracket. Standard Deduction Increase The standard deduction has been nearly doubled, this was done to discourage taxpayers from itemizing their deductions. It simplifies the tax process, and for many people, will reduce their tax liability at year end. For agents, this may still not be enough, especially for those who have heavily leveraged the mileage and home office deductions in years past. Section 179 Deduction Limit Increase For those with rental properties, the use of Section 179 deductions can be a powerful expense. The limit has now increased from $500K to $1M. With an updated $2.5M limitation for new property. No Interest Deduction Limit for Investors For Real Estate Investors, there is no deduction limit on interest expense. For other businesses, there is a new 30% limitation. This limitation does not apply to Real Estate investors. What this means is that the deduction limit imposed on individual homebuyers is not an issue for investors. 

STRATEGY

For Real Estate Agents who have a concern that they may be losing out on under tax reform, we have a strategy. First, if you are not already, you need to incorporate. We recommend a flow through entity, such as an LLC. Flow through entities are eligible for a 20% Qualified Business Deduction, which means that the taxable income that is in the business will be reduced by 20%, baring certain exemptions (Such as total income), before it ends up on your individual returns. What needs to happen with the business entity, is all business expenses must flow through the business. We recommend a separate bank account, which receives cash payments, and is used to purchase all goods and services used by the agent in the ordinary course of their business. For items like mileage, a basic reimbursement from the business to the agent would suffice. It is important to have receipts, or track mileage for record keeping purposes. Ensure those expenses are only attributed to business items. Driving to the grocery store, shopping and picking the kids up from school are not valid business mileage items. Your business could also pay you a base salary, and related payroll taxes, this will help to reduce the end of the year tax liability, by spreading out tax payments throughout the year. It is important to keep business and personal items separate, for Real Estate Agents it can be tempting to mix the two, but this can have consequences later on. By separating bank accounts, being deliberate about cash exchanges between the individual and the business. By collecting a salary, and having reasonable documentation of all business expenses, personal distributions, and revenues, you can maximize tax benefits, and hold onto more of your hard earned money. 

FOR HOMEBUYERS

 SALT (State and Local Tax) There is now a limitation on the state and local tax deduction. This will have an impact on individuals who pay high property taxes, as the limit is $10K (Married, filing jointly) and $5K (Single). Home Mortgage Interest The limitation on how much a homeowner may deduct of mortgage interest is now reduced to $750K (Married, filing jointly) and $350K (Single). This is important because it may reduce home-buyers’ appetites for more expensive properties. Additionally, it may reduce their interest in second properties. As it is a total limitation. Primary Residence for a couple married, filing jointly: $650K mortgage, and a secondary residence with $250K mortgage, they can only deduct $750K, not the full $900K worth of their collective mortgages. This limitation applies to all mortgages dated 12/15/2017 and beyond. 

Moving Expense Deduction It will be discussed in more detail in the Real Estate Agent Section, but the deduction for moving is no longer around. It was previously a part of the Unreimbursed Employee Expenses, but those have been eliminated. This may reduce mobility for those who previously used this deduction. 

Moving Expense Deduction It will be discussed in more detail in the Real Estate Agent Section, but the deduction for moving is no longer around. It was previously a part of the Unreimbursed Employee Expenses, but those have been eliminated. This may reduce mobility for those who previously used this deduction. 

Adam Fenner

Wilsonlakeaccounting.com

Adam@WilsonLakeAccounting.com

480 878 1627

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