Tax Planning for Real Estate

Transcription

1 Tax Planning for Real Estate Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates, LLP

2 Pass-thru Deduction Deduction equal to 20% of domestic qualified business income (QBI) from a passthrough entity Basically, provides an effective top marginal rate of 29.6% 199A,

3 Pass-thru Deduction For those with taxable income in excess of $415,000 (MFJ) the deduction is limited to the greater of: 50% of W-2 Wages 25% of W-2 Wages plus 2.5% of unadjusted basis Unavailable to Specified Service Business owner s taxable income in excess of $415,000 (MFJ) Limitations phased-in from $315,000 - $415,000 (MFJ) of taxable income 199A,

4 Pass-thru Deduction TAXPAYER THRESHOLD AMOUNT Single persons, Trusts & Estates $ 157,500 Married persons $ 315,000 4

5 Is it a Service Business per 1202(e)(3)(A), 475(c)(2), or 475(e)(2)? No Is taxable income over the threshold? 315/157.5 No Deduction = QBI x 20% Yes Yes Is taxable income over the threshold? 315/157.5 Yes No Deduction = QBI x 20% Over full Phase in? 415/207.5 Yes No Deduction Reduced Is taxable income over the full phase-in? 415/207.5 Yes No Deduction No Deduction Reduced Deduction equals lesser of: QBI x 20% or The greater of: - W-2 wages x 50% - W-2 wages x 25% + 2.5% of unadjusted basis 5

6 Pass-thru Deduction The deduction also cannot exceed the lesser of The Combined QBI Amount, or 20% x (total taxable income capital gain) Combined QBI amount = deduction for each qualified trade or business PLUS 20% of REIT dividends and PTP income 199A, %

7 Limitation Formula Definitions Simplified W-2 Wages Equal to wage expense [ 199A(f)(1)] Does not include guaranteed payments or payments to independent contractors Qualified Property Tangible property being depreciated (e.g. does not include land) Depreciation period is the latter of the regular depreciation period or 10-years Unadjusted Basis 7 Equal to basis immediately after acquisition Not adjusted for depreciation 199A, 11011

8 Qualified Property The Statute (6) Qualified property. For purposes of this section: (A) In general. The term qualified property means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167 (i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year, (ii) which is used at any point during the taxable year in the production of qualified business income, and (iii) the depreciable period for which has not ended before the close of the taxable year. 8

9 Qualified Property The Statute (B) Depreciable period. The term depreciable period means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on 20 the later of (i) the date that is 10 years after such date, or (ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof). Vanishing Basis Issue 9

10 Pass-thru Deduction Vanishing Unadjusted Basis Example John owns two apartment buildings The basis of the building acquired 30-years ago cannot be considered for the 2.5% test More recent capitalized improvements are included Appliances replaced within the last 10-years are included The basis of the building acquired 6-years ago can be considered for the 2.5% test All of the appliances are included All of the capitalized improvements are included The basis of the land is not included 199A,

11 Partnerships & S-Corps Allocable Share Simplified Partner/shareholder must use their allocable share for all calculations Example 50/50 partners Each considers half of QBI, wages, & basis in making all calculations 11

12 Business Interest Deduction The bill disallows interest expense in excess of 30% of a business s adjusted taxable income Tested on an entity-by-entity basis Businesses with average gross receipts that do no exceed $25,000,000 are exempt Tested on an affiliated group basis Any interest disallowed is carried forward indefinitely 163(j)(1)-(3),

13 Business Interest Deduction Adjusted taxable income is computed without regard to Business interest or business interest income NOL deductions 199A pass-thru deductions Depreciation, amortization or depletion before (j)(8)(A),

14 Business Interest Deduction Application to partnerships Applied at the partnership level There are however certain allocations made to each partner, including basis adjustments, for carryforwards Application to S-corporations Applied at the corporate level Application to individuals Applied generally as if the taxpayer was a corporation or partnership 163(j)(4),

15 Business Interest Deduction A Real Property Trade or Business or Farming Business can elect for the interest limitation to not apply Real Property Trade or Business is defined in 469(c)(7)(C) Election out is irrevocable Election out requires the taxpayer to use ADS Longer depreciation periods Ineligible for bonus depreciation 163(j)(7),

16 Business Interest Deduction Example John and Mary own a number of nursing homes All the facilities are owned by a corporation started by Mary s great grandfather Average gross receipts are about $30,000,000 and adjusted taxable income is about $5,000,000 The business has enormous capital requirements and pays over $2,000,000 of interest annually The legislation limits the deductible amount to $1,500,000 ($5,000,000 x 30%) Note in 2022 adjusted taxable income will decrease substantially as depreciation will be considered and therefore the amount of deductible interest will decrease substantially 163(j)(7),

17 Business Interest Deduction Average Gross Receipts $ 30,000,000 $ 30,000,000 Less: Operating Expenses (25,000,000) (25,000,000) Less: Depreciation (1,750,000) Adjusted Taxable Income $ 5,000,000 $ 3,250,000 Interest Limitation 30% $ 1,500,000 $ 975, (j)(7),

18 Cost Recovery Bonus Depreciation Period Applicable Percentage 9/27/ % % % % % Expanded to Include Used Property (formerly only allowed new property) 168,

19 Cost Recovery IRC 179 Expansion Currently, a taxpayer may expense (under IRC 179) up to $500,000 of property. However, this is phased out if a business places over $2,000,000 of property in service during the tax year The proposal increases the expensing limit to $1,000,000 and the phase-out to $2,500, , Note, Section 179 applies to new and used property

20 Cost Recovery IRC 179 Expansion (cont.) Expands the definition of qualified tangible personal property and qualified real property eligible to include tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning; fire protection and alarm systems; and security systems. 179,

21 Cost Recovery A real property trade or business which elects out of the new limit on the deduction for interest paid must use ADS; which requires the following recover periods: Qualified improvement property 39 years 20 years Nonresidential real property 40 years 40 years Residential real property 40 years 30 years 168,

22 Cost Recovery Consolidates qualified leasehold improvement, qualified restaurant, and qualified retail improvement property New term: qualified improvement property 15-year general recovery period; 20-year ADS Generally, depreciable over 10 years using the straight line method and half-year convention Most 179 expensing to remain 168,

23 New Loss Limitation Amends 461 to add a new subsection (l) Excess business losses disallowed Business losses (aggregate) in excess of $500,000 (MJF) disallowed Excess loss becomes a NOL Applies at the partner or shareholder level New fourth tier: Basis Limit At-Risk Limit 465 Passive Loss Limit 469 Active Loss Limit ,

24 Like-Kind Exchanges The bill limits like-kind exchanges to real property May complicate some transactions with personal property However, the bill allows transactions open at the end of 2017 to be completed taxfree 1031,

25 Development Incentives Rehabilitation credit Tax Reform eliminates the 10% credit for the rehabilitation of certain buildings constructed before 1936 Tax Reform retains the 20% credit for the rehabilitation of historic structures, but now requires it to be claimed over 5-years instead of in the year placed in Service 47 25

26 Development Incentives Opportunity Zones Allows a taxpayer to defer capital gains that are reinvested in an Opportunity Zone Opportunity Zones are certain low-income census tracts Qualified property can include stock, partnership interest, or business property If the Opportunity Zone investment is held for at least 10-years, the taxpayer can elect that basis equals fair market value at sale 1400Z-2,

27 AICPA PFP Section Member Resources PFP Section members, inclusive of CPA/PFS credential holders, have access to resources on the latest planning strategies and trends in personal financial planning services so that they can practice competently and profitably. Visit aicpa.org/pfp/resources. Estate Tax Retirement Investment Insurance & Risk Management Practice Management Legislative/ Regulatory Professional Responsibilities Consumer Content 27

28 About the PFP Section & PFS Credential The AICPA Personal Financial Planning (PFP) Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners. (Learn more at aicpa.org/pfp.) The Personal Financial Specialist (PFS) program allows CPAs to gain and demonstrate competence and confidence in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners through experience, education, examination and the resulting PFS credential. (Learn more at aicpa.org/pfs.) 28

29 Disclaimer This podcast is designed to provide illustrative information with respect to the subject matter covered, and does not represent an official opinion or position of the AICPA or AICPA.Org. It is provided with the understanding that the AICPA and AICPA.Org are not engaged in offering legal, accounting or other professional service. If such advice or expert assistance is required, the services of a competent, professional person should be sought. The AICPA and AICPA.Org make no representations, warranties or guarantees as to, and assume no responsibility for, the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of, reference to, or reliance on such material. 29

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