If you want to energize a room full of people, pose the following question: “What do y’all think? Is real estate a good investment?”
Even among financially savvy people, this question can bring out passionate — and smart — arguments on either side. But ultimately, as with most financial matters, deciding whether to invest in real estate is a personal decision.
That being said, there’s one thing no one can deny: Being a landlord comes with tax benefits. And, starting this year, they’ll be even sweeter than before.
Do You Really Want to Be a Landlord?
Before going any further, though, you should ask yourself an important question: Do you really want to be a landlord?
While it can seem like a lucrative investment opportunity, owning rental property is also a lot of work. Not only do you need to find and purchase a unit, you need to get it ready for rental, look for and maintain tenants, and pay for repairs.
Being a landlord also comes with risk: in terms of vacancy and depreciation, but also liability. (To protect your assets, you should register an LLC or purchase liability insurance — or both.)
If all that doesn’t sound appealing, you could consider alternative ways to invest in real estate: innovative companies like Fundrise, Roofstock, or HomeUnion, or real estate investment trusts (REITs).
Perhaps, however, you already own one or more rental properties. Or you just really want to try being a landlord. If that’s the case, then keep reading; we’ve got a tax break you need to know about.
How Rental Property Income Works
As a landlord, you cover the mortgage, taxes, insurance, repairs, and some utilities — and then charge your tenant a monthly rent. Anything that’s left over is your rental income.
On that income, you’ll enjoy several tax advantages, including:
- Deductions for mortgage interest on your rental property, as well as state and local real estate taxes
- Deductions for depreciation of your unit (and travel expenses there and back)
- Deductions for utilities, repairs, yard work, insurance, etc.
- Exemption from self-employment taxes
But the biggest tax benefit is new this year…
What Is the QBI Deduction?
Most small-time rental operations qualify as “pass-through businesses,” which means that, instead of paying corporate taxes, your income is passed through to your individual income and taxed at the same rate.
And starting in 2018, pass-through businesses are allowed to deduct 20% of their “qualified business income” (QBI). In other words, you’ll only have to pay taxes on 80% of your rental income.
(Note this is a personal deduction that you can take whether or not you itemize, but it’s not an “above-the-line” deduction and therefore won’t reduce your adjusted gross income.)
To qualify for the QBI deduction, your taxable income must be below:
- $157,500 for single filers
- $315,000 for married couples filing jointly
If you fall below that threshold, your tax deduction will equal 20% of your rental income. Easy peasy.
But if your income is above that threshold, it gets much more complicated. While you still qualify for the 20% QBI deduction, it can’t exceed:
- 50% of W-2 wages paid to employees OR
- 25% of W-2 wages paid to employees, plus 2.5% of the unadjusted asset basis (purchase price of your rental property)
Since most landlords don’t have employees, they’ll probably use the latter number. But, because we’re not accountants, we don’t want to dive too far into the weeds; you should speak to your tax professional about how this deduction would work for you (or see examples here).
Suffice it to say that if you’re a landlord, the QBI deduction is a welcome change — and yet another of the many tax benefits you can enjoy.
If you’d like to discuss this, or any other financial topic, get in touch and we’ll be happy to help.