Rental property tax deductions and unpredictable tax changes don't mix well

If you’re a rental property owner, every tax season you probably ask if the benefits of rental property tax deductions and the income are really worth all the hard work? This tax season is different, however, with the new tax laws and the knowledge that major changes are coming for the 2018 tax year.

What tax changes can be expected?

It appears that the Tax Cuts and Jobs Act of 2017 could change the way rental income will be taxed in 2018. Taxpayers with qualified business income, which will include rental income, may be eligible to take a tax deduction up to 20% of their QBI.

Owning rental property can be a smart financial investment, but it’s not for everyone. Everything about it, from defining rental property and income, the astronomical amount of recordkeeping, and continuous sweat equity makes being a landlord hard work. Expecting continuous positive tax changes in a changing tax climate is not necessarily a good, solid reason to invest in rental property.

What is rental property?

A broad stroke definition is a residential property that derives more than 80% of its revenue from dwelling units, and from which the owner receives payment from the tenant and the owner may be allowed to claim certain tax deductions. Residential properties contain one or more dwelling units which the IRS defines as a space with the basics you need to live (a place to sleep, cook, eat, and a toilet).

What is rental property income?

Generally, all amounts and any payment received for the use or occupation of the property. This could include:

Advance rent,
Security deposits
Payment for canceling a lease
Expenses paid by renter
Payments considered under lease with option to buy
Your part of the rental income if you own a part interest in a rental property.

Why is there so much recordkeeping?

Owning rental property is complicated and can change dramatically during the year. Issues can include whether you rent buildings, rooms or apartments and the income, expenses, and depreciation of each property. Rental property owners deal with mortgages, insurance, capital gains or the concern that the investment isn’t liquid. Even well-vetted renters can become tenants who disappear and leave the property in destruction.

Rental property tax deductions under the new 2017 tax law.

Under current law, rental income is classified as “passive income” and that income simply passes through to the owner’s personal tax return and they pay ordinary income tax on it. Beginning in the 2018 tax year, rental income will be eligible to receive the same preferential tax treatment as the “qualified business income” (QBI) for small business owners.

What’s the bottom line?

The tax laws for 2018 are still being released and the QBI issue, which includes rental property tax deductions, is among the issues the AICPA has requested immediate guidance on from the IRS. If you have rental property or are planning to acquire rental property in 2018, I encourage you to contact our office and schedule an appointment.

If you’ve never consulted a CPA tax professional for individual or business tax strategy, now is the time to do it. Don’t pit yourself against the IRS. Don’t ask and accept a real estate agent’s assurances about tax implications of buying or selling rental property. We have clients who are successful realtors, and they know every tax situation is unique and part of an overall financial plan of the individual or business. That’s why they would rather refer you to the CPA tax professional they trust.

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You may also be interested in these:

The IRS Residential Rental Property publication for 2017 returns. Might be hard to find in a few months.

S and C corp regulations still unclear for 2018