Legal Matters & TaxesHow the 2018 Tax Reform Affects Real Estate Investors by Sylvia Shalhout January 27, 2018February 19, 2019 by Sylvia Shalhout January 27, 2018February 19, 2019Real estate investors should have a general understanding of tax law as it can either cost them money or end up saving them a lot of money in real estate investing.The biggest tax reform in the last 30 years of US history was signed this past December and took effect in January of 2018. Many real estate investors are curious as to whether this tax reform is a good thing or a bad thing for current and future real estate investments. Here is how this tax reform affects real estate investors.Individual Income Tax Rates and BracketsWhile the structure of tax brackets remains the same under the new tax reform (seven brackets), the tax rates have been reduced. The highest tax rate has been changed from 39.6% to 37%. The amount of taxable income for each bracket has also been raised slightly, allowing taxpayers to possibly move down to lower brackets.How This Tax Reform Affects Real Estate InvestorsIn general, real estate investors will benefit from paying lower taxes just like every other taxpayer. This means a higher return on investment for real estate investments.Standard Tax Deduction vs. Itemized Tax DeductionTaxpayers have the option of choosing between a standard tax deduction and an itemized tax deduction. A standard tax deduction is a flat rate, while an itemized tax deduction requires taxpayers to list qualified individual tax deductions and claim the total sum of the list for a tax deduction.Before the tax reform, the standard tax deduction was set at $6,350 for a tax filer who is single and $12,700 for a married couple. The tax reform of 2018 now nearly doubled these amounts: $12,000 and $24,000, respectively. This means that more people will probably be opting for a standard tax deduction as it will end up amounting to more than an itemized tax deduction. In addition to this tax reform, many tax deductions no longer qualify for an itemized deduction for real estate investments as they once did.How This Tax Reform Affects Real Estate InvestorsOne of the benefits of real estate investing and owning a home was tax benefits. The itemized tax deduction for real estate investors usually amounted to more than the standard tax deduction. With the new tax reform, an estimated 38 million US citizens will now choose standard deductions. The new tax reform gets rid of any real estate property tax incentive to purchase real estate property and own a home. This means more renters for real estate investors as opposed to owner-occupier buyers. Real estate investors may have to rethink their real estate investment strategy and opt for holding on to rental properties because of this change in standard tax deduction.Related: 7 Major Benefits of Investing in Real EstateHome Equity Interest Tax DeductionMortgage interest tax deduction remains in place, with a change of the limit from $1 million to $750,000. However, real estate investors will no longer be allowed to deduct interest from home equity lines. Even real estate investors who had interest on home equity lines before the tax reform will not be able to claim this tax deduction.How This Tax Reform Affects Real Estate InvestorsMany real estate investors turned to this form of financing for real estate investing as an alternative to conventional bank loans. While, of course, they will still have the option, real estate investors going for this type of financing will no longer save any money on tax deductions from interest on home equity lines. This ultimately lowers return on investment for these real estate investors.Related: What Are Your Options for Financing Rental Properties?State and Local Tax DeductionsState and Local Tax (SALT) deductions will still apply under the new tax reforms. However, there is now a set maximum of $10,000 for the combination of state and local income property taxes.How This Tax Reform Affects Real Estate InvestorsIf you’re a real estate investor who has investments in states with higher taxes like New York, California, or New Jersey, you’re likely to see an increase in the taxes that you pay for 2018. This will be the case because state and local property tax deductions for such areas are likely to exceed the $10,000 limit.Click here to use Mashvisor’s Investment Property Calculator to see how property taxes affect your return on investment. A real estate investor looking for new investment properties may wish to look in other states in order to benefit from property taxes. To find an investment property in another location, visit Mashvisor to find the best options in the real estate market.Related: The Best States with No Property Tax for Real Estate InvestingPass-Through Income TaxesReal estate investors can now benefit from lower taxes because of pass-through income. This is income earned from partnerships, S corporations, and limited liability corporations (LLC). Those who have pass-through income can now claim up to 20% in tax deductions.How This Tax Reform Affects Real Estate InvestorsA real estate investor will now find it favorable to create a pass-through income. This means that real estate investors will be holding on to their investment property for the sake of tax benefits and an increased return on investment. This could possibly result in a shortage of homes for sale in the real estate market.There are a few other ways of how this tax reform affects real estate investors and the real estate market. Because of the advantageous move towards pass-through income, real estate developers will likely increase the building of rental properties like apartments for rent rather than single family homes. Commercial real estate investments will qualify for the pass-through income tax deductions, meaning that the real estate market will likely see more offices for lease built as well.Click here to find and analyze an investment property. Real Estate Investment Depreciation for a Real Estate BusinessThe new tax reform limits business expense tax deductions to the sum of business interest income in addition to 30% of adjustable tax income.How This Tax Reform Affects Real Estate InvestorsReal estate investors with a real estate business have two options: either save less on their taxes through tax deductions or opt out of this tax reform and end up with longer depreciation periods. If a real estate business decides to elect not to claim business expense tax deductions, depreciation periods will become longer: 30 years for residential real estate property and 40 years for nonresidential real estate property. This is in comparison to 27.5 years for residential real estate property and 39 years for nonresidential real estate property.Choosing longer depreciation on real estate property amounts to a negative effect on overall return on investment. A real estate business will have to weigh the options and decide which one will save more money.1031 Exchange The 1031 exchange has not changed much in terms of deference of capital gains on real estate property. However, the definition of what can be claimed under the 1031 exchange has changed. Personal property will no longer be allowed as a tax deductible.How This Tax Reform Affects Real Estate InvestorsLuckily, many real estate investors won’t feel any effect. However, those who used the 1031 exchange to save money on things like furniture and equipment used for real estate investing will no longer be allowed to do so under the new tax reform.The 2018 tax reform affects real estate investors and the real estate market both positively and negatively. Before getting into real estate investing, starting a real estate business, or taking on new real estate investments in 2018, be sure to consult a tax advisor to know how the new tax reform will affect your return on investment. Start Your Investment Property Search! START FREE TRIAL 1031 ExchangeEquityLocationPartnershipsRental IncomeTax Benefits 0FacebookTwitterGoogle +PinterestLinkedin Sylvia ShalhoutSylvia is the Content Marketing Manager at Mashvisor. As a real estate writer, she has been covering topics for the beginner and advanced real estate investor, helping them make smarter decisions as well as real estate agents looking to take their business to the next level. 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