Tax Win: IRS Provides Clear Test on How 20% Deduction Applies to Rental Income, Exchanges

The Internal Revenue Service has issued final rules on the 20 percent business income deduction (Sec. 199A of the Tax Code) that was enacted in late 2017 as part of the Tax Cuts and Jobs Act.

Among other things, the rules confirm that the deduction applies to your business income, as a real estate agent or broker, if you operate as a sole proprietor or owner of a partnership, S corporation, or limited liability company. It applies even if your income exceeds a threshold set in the law of $157,500 for single filers and $315,000 for joint filers.

In addition, the rules provide guidance that NAR has been seeking on two other provisions of importance to you: 1) whether any real estate rental income you have is eligible for the deduction, and 2) how the deduction applies to properties you’ve exchanged under Sec. 1031 of the tax code.

Eligibility of rental income
If you generate rental property income, that income can also qualify for the new deduction, as long as you can show that your rental operation is part of a trade or business. The IRS has released proposed guidelines that include a bright-line test, or safe harbor, for showing that your rental income rises to the level of a trade or business. Under that safe harbor, you can claim the deduction if your rental activities—which include maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities—total at least 250 hours a year. If your activity totals less than that, you can still try to take the deduction, but you’ll have to be prepared to show the IRS that your activity is part of a trade or business.

Eligibility of 1031 like-kind exchanges
Under earlier proposed regulations, if your income was above threshold levels set in the tax law—$157,500 for single filers, $315,000, for joint filers—and you had exchanged one property for another to defer taxes under Sec. 1031 of the tax code, the amount of the new deduction might be reduced because of the swap. NAR and other trade groups reached out to the IRS to change this treatment, and the IRS has made that change. Under the final rules, you can use the unadjusted basis of the depreciable portion of the property to claim at least a partial deduction.

“The final rules are the result of several months of advocacy and collaboration between NAR, our members, and the administration,” says NAR President John Smaby. “They reflect many changes that NAR sought to ensure the new 20 percent deduction applies as broadly as possible.”


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As a Realtor, part of my job is to watch the market. I’ve been watching it, since 2004. Not surprisingly, my clients always ask me, “what do you think the market will do?” The government shutdown has added another layer of uncertainty on an already questioning atmosphere, wondering how Brexit, the tariffs, and the Mueller investigation will impact our economy. The truth is, no one knows.
Most economic forecasts will tell you that 2019, “should be good, not great,” and that we’ll slow down, or have flattened prices, while at the same time, they assure you that there’s no reason to panic. (Who’s panicking?)
If you’re like most people, you read books and blogs, surf the internet, watch the news and cruise real estate sites and are nervously waiting for a reduction in housing prices. Most experienced agents, would disagree that a *major* price adjustment is coming.
I knew clients once who waited eight years to buy, always hoping the prices would drop. They waited from about 2006 to 2014; big mistake. They paid about $800,000 more, for a lesser neighborhood, and lost eight years of equity. True story. The best time to buy or sell, is when you’re ready!
The thing that sets the Bay Area apart, and the reason why you can’t apply national news reports to our housing market, is that we are a Financial Microclimate. The Bay Area is a world, unto itself. There are Goliath Companies in our midst that employ hundreds of thousands of people and they are solid companies: Google, Apple, Twitter, Facebook, UCSF, Genentech, Oracle and more. These employees are eating in our restaurants, shopping in our retail stores and renting apartments for high prices, or buying condos and homes. There isn’t just one industry here—there are several. These employees are making far more than the national average and coupled with a housing shortage, well, you’ve seen the news.
For people considering a property sale or purchase, it’s always a good time, in the Bay Area. I might get accused of sounding like a realtor when I say that, but it’s true. Because even if the prices do go down, and let’s just say it does go down, the wave up will be higher than it is now. The equity you lose waiting, is thousands, if not tens of thousand, more than any savings you’re trying find.
If you have a home and you’re thinking of selling, there are people out there desperate to buy. Right now you’ll get a good price and you may be able to negotiate a later move out, so that you are able to find a place to go. If you want to buy, do it now, interest rates can greatly effect your payments, even if they go up a quarter or half a percent.
Within the Bay Area these microclimates are growing and they are changing prices in areas formerly unknown, or unnoticed, by eager homebuyers. Ferries, BART & the SMART train are expanding and unifying outside areas so people have more options to live and work wherever they chose. No matter what your price range OR how much you have to invest, there is a good market for you.
If you’re not sure about your credit score, what your mortgage payment would be, or how to start the process, give me a call or send me an email at [email protected]

Sandra Luna

415-279-8610   [email protected]   Lic. #01747658

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