Preparing for Tax Time 2019
Much of the tax landscape changed with the Tax Cuts and Jobs Act of 2017. Some of these changes were beneficial and others — the impacts remain to be seen. Today we examine some of the things real estate agents should be considering when preparing to file taxes.
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Preparing for Tax Time 2019
By: D. Keith B. Dunnagan, Esq.
April 15th is just around the corner and you should be preparing to file your taxes if you have not done so already. As you are preparing your tax filing for 2018 you should also be thinking and preparing for 2019 taxes. As a real estate professional there are a litany of issues to consider related to your tax plan.
First as a real estate professional you need to think about the tax treatment of your income. Most agents are commissioned base pay and receive a 1099 from their broker related to the income earned. This means all the payroll tax (social security and medicare taxes) are paid by the agent rather than the employer covering a portion and the employee covering a portion.
Under the Tax Cuts and Jobs Act of 2017 significant changes were made. While income rates in each bracket were reduced by three to four percent and the standard deduction was significantly increased, many personal deductions were reduced or eliminated. The SALT deduction (State and Local Tax Deduction) which was limitless (meaning all state and local taxes were deductible) is now capped at $10,000. This can be an issue in California with its high income tax rates and property taxes which combined often exceed $10,000. Other personal deductions like the home office deduction, work clothes deduction, moving expense deduction and licensing fee deductions were suspended as a result of the new law.
However, the impact of the deductions depends on the way you earn your income. If you are a sole proprietor all of this money is likely subject to payroll taxes and the restrictions on personal deductions. However, if you have formed and are operating in a corporate manner, it is important to understand the survival of the business expense deductions that are allowable under the new laws.
For real estate professionals two things that are important to note, both the Real Estate Professionals Safe Harbor Passive Activity rule under Section 469 and the Section 179 Expensing rules both survived the tax reform. Section 179 allows certain business expenses to be expensed immediately on your tax returns rather than having to depreciate the asset over time. A significant benefit in creating deductions against your income in a taxable year. As to the Section 469 Safe Harbor rule, by qualifying as a real estate professional you can overcome the passive activity presumption thereby allowing the use of rental losses without limitation and potentially escaping a 3.8% surtax under Section 1411.
However, the real estate professional should also be thinking about investment transactions. Under the 2017 tax reform 1031 exchanges survived. Long on the chopping block, 1031 exchanges continue to be significant component in the investment market by allowing investors to exchange like property while deferring taxes. Functionally, it not only allows but encourages investors to perpetuate their investments by trading up. The investment property value increases, that increase allows the investor to sell and acquire a larger or more valuable investment property. While normally the transactions would be subject to taxation, by using the Sec. 1031 appropriately, the investor can make that transition between “like kind” property without triggering taxes. However, when the investor does seek to finally liquidate and exit the final investment the taxes will then be triggered on that sale. If contemplating an investment related transaction make sure to consider the rules and application of the 1031 exchange. There are strict timing requirements that must be met.
Significant changes were made to the tax code as a result of the 2017 tax reform. As you prepare your taxes for 2018 and begin to think strategically about your potential tax liabilities for 2019, remember that is important to consult with your CPA and other tax professionals.
The attorneys of BPE Law Group, PC. have been advising our clients on real estate, business and estate planning issues for over 20 years and have assisted numerous clients in business and real estate matters and have represented and advised brokers on their professional obligations as well as consumers on their rights. If you have questions concerning legal matters, give us a call at (916) 966-2260 or e-mail Keith at firstname.lastname@example.org. Our flat fee consult for new clients may get you the answers you need for the questions you have.
The information presented in this Article is not to be taken as legal or tax advice. Every person’s situation is different. If you are facing a legal or tax issue of any kind, get competent legal and accounting advice in your State immediately so that you can determine your best options.