As we approach tax season, the Internal Revenue Service (IRS) has been releasing final clarifications for last year’s major tax overhaul, the Tax Cuts and Jobs Act, which left many questions unanswered, especially for real estate professionals.
Now, the industry has secured another win with the help of the National Association of REALTORS® (NAR), as the Internal Revenue Service (IRS) and Treasury announced final regulations concerning the Qualified Business Income deduction.
The initial overhaul brought the corporate tax rate down from 35 percent to 21 percent but was vague in how business structures played a role in the deduction, and how the IRS categorized real estate professionals. Here are the three major clarifications set to impact real estate professionals:
Business Structure: Any real estate agent or broker who operates as a sole proprietor or owner of a partnership, S corporation or LLC—and is not recognized as an employee—is eligible for a deduction of up to 20 percent, even if their income exceeds the $157,500 threshold for single filers or the $315,000 ceiling for joint filers.
Property Categorization: The IRS clarified how rental properties are categorized as either trade or business, simplifying the process for rental real estate property owners who wish to claim the deduction. A bright-line safe harbor test is included in the new regulation, requiring that at least 250 hours are spent each year on maintaining and fixing property, collecting rent and paying expenses, and performing landlord-specific activities.
Like-Kind Exchanges: The IRS and Treasury reversed a policy that previously denied deduction eligibility to those who exchanged one real estate parcel for another under Section 1031.
“[This] ruling is a result of several months of advocacy and collaboration between NAR, our members and the administration,” said NAR President John Smaby in a statement. “These final guidelines will allow real estate professionals to benefit from the Section 199A 20 percent pass-through deduction, a move that will empower REALTORS® to expand their operations and provide improved services to consumers and potential homebuyers across the country. The National Association of REALTORS® is grateful for the openness and transparency encouraged by Treasury and the IRS, and we thank them for their hard work to ensure the real estate community was heard throughout this rulemaking process.”
“NAR maintained consistent and coordinated communication with Treasury and the IRS throughout this rulemaking process,” said Shannon McGahn, senior vice president of Government Affairs at NAR. “The finalized ruling, which represents a tremendous win for real estate professionals across the country, is a direct result of that engagement. We are thrilled to see our members emerge from this process so favorably, and we thank Treasury and the IRS for all of their hard work in ensuring consistency and clarity within these policies as America’s 1.3 million REALTORS® begin filing their 2018 tax returns in the coming weeks.”
For more information on the new tax law, please visit www.nar.realtor/tax-reform.