How The Tax Bill Impacts Minneapolis Duplex Owners

Now that we’re a month past the passage of the new tax bill, what exactly does it mean to Minneapolis duplex owners and investment property landlords?

First, if you own your rental property as a sole proprietor, LLC or partnership, you own it is a pass-through entity. In other words, any profit you make on the investment is passed through to your personal income taxes, and you pay taxes on it at your individual rate.

The Tax Cuts and Jobs Act (TCJA), created a new tax deduction for people who have pass-through income.

If your activity with rental property qualifies as a business, you now may now deduct an amount equal to 20 percent of your net rental income. In other words, if you qualify for this, you’ll be taxed on 80 percent of your rental income rather than 100 percent.

In order to qualify for this deduction, you must:

  • operate the rental business as a sole proprietor, S corporation shareholder, LLC owner or partner in a partnership and
  • you can’t have more than $315,000 in taxable income for the year if you’re a married couple filing jointly, or $157,500 if you’re single.

If you’re lucky enough to earn more than that, the deduction is phased out and eliminated entirely for single people who make more than $207,500 and couples who make more than $415,000. However, you can still qualify if:

  • The deduction just can’t be more than 50 percent of your share of the W-2 wages paid by your rental business or
  • 25 percent of your portion of the W-2 wages plus 2.5 percent of the original purchase price of the depreciable property. In other words, if you paid $300,000 for a duplex, and the land value was $100,000, you could take 2.5 percent of the $200,o00 value on the building itself. This deduction can be taken during the entire depreciation period for the property (27.5 years on residential property). You do have to commit to it though, as once you take it, you must continue to do so for at least 10 years.

Second, starting in 2018, you can start to deduct the cost of personal property used in residential rentals. In other words, if you had to buy a new refrigerator for a unit, you may now deduct it as an expense.

Next, duplex owners may take something called “bonus depreciation” on any personal property purchased for their rental property business. In the past, investors could deduct 50 percent of the cost of any personal property they purchase for their business in a year. Now, any personal property purchased after September 2017 is 100 percent deductible.

For the first time, 100 percent bonus depreciation may applied to both new and used property, rather than just new property. This benefit will begin to be phased out after 2023, and eliminated in 2027.

This bonus may not be used for the building itself. Rather, it can be used on anything that has a depreciation schedule shorter than 20 years. That may include appliances, washers and dryers, yard equipment and furniture. It also applies to landscaping!

Third, since mortgage interest is considered an expense in a rental property business, it is not impacted by the limits to mortgage interest deductions.

Finally, if you are self-employed, you probably know you’re required to pay Social Security and Medicare taxes on your net business income, as well as personal income tax. However, income you net from your rental property is exempt from this; with one exception.

Landlords who provide substantial services to their tenants – like an AirBnB or bed and breakfast, are required to pay self-employment taxes on the income they generate. That’s important to know for those of you renting out units for the Super Bowl.

Of course, more will be sorted out as tax professionals work their way through the new bill.  Be sure to check with your tax advisor on how the new tax laws impact you.