What's on the Real Estate horizon due to the Tax Act?
- Transactions with REITs will be much more popular
During transactions, using REITS is going to become much more popular under this law. Certain items of income which on a flow through basis would not be subject to the 20% deduction, would be subject if they’re held through a REIT. This would include income that qualifies as good REIT income such as, mortgage interest and income from property that is not subject to depreciation, like the Brown-List.
So, if that income is earned directly it's subject to the top bracket, at 37%. And certain expenses and carrying on those activities, which would normally be treated as investment expenses, wouldn't be deductible for individuals. If it's income earned by a REIT, one, your net owner's expenses against that income so you get the benefit of the deductions and, two, the income is subject to the 20% discount for tax based on the 199 Cap A Deduction. So REITs are going to become much more popular in planning going forward.
New limits impacting tax planning include deductions for interest limited to 30% of income before interest, taxes and depreciation and real Estate companies can elect out by lengthening depreciation for assets.
Real Estate professionals can still deduct losses against income and losses now being limited to $500,000 per year are downsides to the Tax Act. If you're a real estate professional you get to deduct your losses against any other types of income.
The section 199A deduction - whay it's important: 20% deduction on flow-through income including rental income and reduces tax rate on income from top bracket from 37% to 29.6%.