Previous to the federal government close down earlier this year, IRS interpretations of the Jobs Act and Tax Cut (TCJA) were issued for depreciation and expenses for real estate, affirm that the time is correct for building something, even if for not a wall.
From the start it was evident the TCJA benefited real estate investors, and recent interpretations underscore these benefits.
Despite the drop in property prices and rentals over the last few years, Dubai property offers rental yields more than double of what is offered by the world’s major established cities such as London, Paris and New York, according to industry analysts.
This is a great time to get out and start to make money in real estate. Lay up your sleeves, and get to work as an effective investor, or more passively through private lenders (our firm is one of the many).
To help you make an abreast decision, below are some of the key differences in federal rules that make money in real estate even more alluring.
1- A cap in the Mortgage Interest Deduction Allows Homeowners to Deduct Interest
This deduction remains one of the best tax benefits available for the real estate asset owned by most Americans. Contrary to many pundits, I expect the new ceiling will contribute to a modest rebound for luxury property.
Last year, we saw a slowdown in the luxury market as homebuyers took a wait-and-see approach to interest rates, TCJA’s limit on property tax deductions and the stock market. Many baby boomers refinanced and remodeled their homes instead of upgrading, but now the lower cap reduces the tax benefit of using a home equity loan this way.
Say your first mortgage is $800,000. While you can keep deducting its interest, now, because of the new cap, you can’t deduct interest on a new home equity line.
Wealthy homeowners now have more impetus to sell their home and plow the proceeds into a down payment for a new mortgage up to $750,000, especially since there’s more clarity around interest rates, the new tax code, and the stock market.
2- If You Make Money in Real Estate as an Individual, Partnership, Sole Proprietor, S-corp or LLC
Effective through 2025, owners of entities that pass through income to individual taxpayers may deduct 20% of “qualified business income” from their “qualified trade” in real estate.
It’s a bit of a gift for developers, contractors, brokers, active investors, and leasing operators since it’s a straight 20% reduction of their taxable income. This gets even more interesting considering the many professional firms that don’t qualify.
Now an entity such as a law firm can move income into a qualified pass-through entity and take the deduction, but only if they own 49% or less of it. In inclusion, they’ll choose to partner with a true real estate efficient in order to do so.
3- Real Estate Deflection Rules are More Agreeable than Ever Because Qualifying Property Captured
If you’re new to real estate investing, this topic may seem arcane, but it can mean big bucks. Depreciation is an expense deducted from rental income annually to reduce your tax bill.
It’s calculated by dividing the property’s value by its number of years of useful life. Bonus depreciation creates advantage because it puts cash back in your pocket with your next tax return, which can be used to pay down principal.
In addition, it creates an incentive to upgrade. Say you buy a qualifying commercial building, refurbish the interior and rent it out. Now, 100% of the renovation cost can be deducted from the first tax year’s rental income. My advice is to leverage this an upgrade.
Not only will you get the bonus depreciation; you can also raise your rents accordingly, putting even more money in your pocket.
As the domestic Revenue Service continues to problems settlement bringing more clarity to the TCJA, take a closer look at investing in real estate.
I have always advocated for and helped facilitate people making money in real estate, and with all these new tax incentives working in your favor, 2019 is a great year to invest.