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Tax Reform Act – Impact on Real Estate Used For Rental Purposes

Tax Reform Act – Impact on Real Estate Used For Rental Purposes
Ines Zemelman, EA
27 December 2017

On December 22, 2017, President Trump signed the Tax Reform Act into law. The Act includes several major changes to many areas of the IRS Code impacting taxpayers who own real estate. Most of the changes are effective January 1, 2018.

Changes are universal and apply to real estate properties located in the US or abroad. The changes affect every individual required to file a US tax return, whether he/she is a US citizen, green card holder or foreign alien investing in US real estate.

Provisions Impacting Real Estate Used in Rental Business - All Positive

Recent tax reform law treats mortgage interest deductions and property tax deductions differently, depending on whether it is personal use or rental use.

The $10K limit on deduction of property, state and local taxes applies to properties not used for rental business. Those are expenses individuals deduct on Schedule A of US tax return.

The property tax and mortgage caps do not apply to taxes incurred in a connection with a trade or business. Individual owners of rental real estate report rental business expenses on Schedule E of US tax return.

Interest Expense Deductions Generally Limited, But Not for Electing Real Property Businesses

Subject to certain exceptions, beginning in 2018, the Act generally limits the annual deduction for business interest expense.

  • The limitation does not apply to interest incurred by the taxpayer in any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business;

Thus, deduction of interest expense for owners or rental properties remains intact.

Immediate Expensing of Qualified Depreciable Personal Property

The Act extends and modifies the additional first-year depreciation deduction for qualified depreciable personal property by increasing the 50% allowance to 100% for property placed in service after September 27, 2017, and before 2023. The bill removes the requirement in current law that the original use of qualified property must commence with the taxpayer. Thus, immediate expensing applies to purchases of used as well as new items.

Section 1031 Tax-Free Exchange Treatment Retained for Real Property Exchanges

The Act modifies the IRC Section 1031 exchange provisions by limiting their application to real property that is not held primarily for sale. Thus, properly structured real property exchanges will continue to enjoy tax deferred treatment under IRC Section 1031. However, the portion of any exchange that includes personal property will no longer qualify for tax deferred treatment under IRC Section 1031.

Ines Zemelman, EA
founder of Taxes for Expats