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Senior Member
Posts: 2,305
Reply with quote  #1 
The new republican tax bill (which hasn't been passed by  both houses and won't be voted upon until next week), also modifies Section 121 as follows:

1) Whereas, the requirement used to be 2 years ownership in last 5 years, now you must own the home 5 years out of 8 years----so much for serial home ownership as a tax strategy.  (Or, at least it will take longer)
2) The deduction starts to phase out to the extent that the home owner earns over 250,000 for an individual homeowner and 500,000 for a couple.

Quite frankly, this was one of the best features of the tax scheme for homeowners.

Added to that, the potential elimination of SALT deduction and mortgage interest----and suddenly real estate is very different from a tax standpoint.

As the Dodd Frank law shows, it really is NOT good news when Congress starts rearranging the tax code.
Bruce DID warn us that that Congress might come after real estate investors.
I will be interested to see what actually passes next week.
I think alot of real estate investors have been dawdling about leaving the market, but this may provide the needed push.

The article estimates that the new tax bill will reduce the value of real estate about 10% (although there are other estimates):

"The proposal to cut the cap to $500,000, however, goes farther than NAR’s model, which also estimated the blueprint would cause a 10% drop in home values—with a greater loss in value in high tax states. Others estimates for drops in home values have been more modest. "

I just think that this combination of unfavorable new tax rules, lower values and the resulting problems in getting anyone approved for a loan under the new standards is just going to be real trouble---who wants it?

I think Bruce may advise us to start thinking of downsizing (unless you are confirmed buy and hold)---though I haven't spoken to him about it yet.

The Fed is going to have their meeting and announce whether interest rates go up on 12/13---It looks we are going to get ALOT of bad news this month.

BTW, I received the following email from Keystone CPA----who are advising considering some year end changes before 2018.  (Including prepaying deductions that are going to be discontinued----that is clever).

Another consideration: If they are going to seriously reduce social security (no concrete proposals, but Paul Ryan and House Republicans have already floated the idea), you might consider getting a distribution early so that the old rules still apply (You can get one starting at age 62, though your take home benefits are lower).

Caveat: I am NOT a CPA, I'm just thinking aloud here---I wouldn't make any moves without checking with your own tax advisor.

Anyway, here is what Keystone CPA (Matt) said:

 "Dear Lawrence 
As you may be aware, year-end 2017 presents a unique set of challenges and potential opportunities in light of the uncertainties created by the proposed tax changes. What changes might be made and whether those changes will be effective for 2017 is still largely unknown as of today. To make sure we do our best to prepare for the pending changes, we have put together a list of some important items for you to consider.
Be Flexible
Over the coming weeks we may finally have better information with respect to any final tax changes that may impact 2017 and 2018. For now, flexibility and preparedness are key. For most of us as taxpayers, there is no urgent need to take drastic action at this time. Rather, we should be ready to do so as late as end of December. This means being ready to take action on any tax opportunities as well as having liquidity to make investments, purchase assets, or prepay expenses in order to capitalize on any finalized tax benefits that may impact us in 2017.
Personal Items
Under the current proposal, many of the personal itemized deductions may be repealed or limited starting in 2018. Should these changes be enacted for 2018, it can make sense for us to prepay some of these expenses in 2017 in order ensure we receive the tax benefits now rather than lose them next year. Some examples of these include out of pocket medical expenses, primary home property taxes, state income taxes, DMV fees, investment expenses such as brokerage fees, tax preparation fees, moving expenses, and unreimbursed work-related expenses.  However, since these changes are still pending legislation, there is no urgent need to run out and prepay all of these at this time. Although we may want to be prepared to do so should the tax changes take place by year-end.
The proposals include a change to the primary home gain exclusion to those who live in the home for the last 5 out of 8 years. This benefit may also be phased out for taxpayers of higher income. However, if the home has a written and binding contract by 12/31/17, it may still fall within the 2 out of 5-year rule even if the sales transaction does not close until 2018. So if you are in the process of selling your primary home and do not currently meet the proposed 5 out of 8 year requirement, it can make sense to get that contract signed by year-end 2017 if the proposal were to be passed.
The ability to convert traditional IRA into a Roth IRA and undo that conversion in the subsequent year may also be on the chopping block. As such, if you were interested in potentially moving funds from taxable IRA into a Roth IRA, doing so by 12/31/17 may be your last chance to un-do that conversion in 2018.
With respect to kids, the proposal may allow 529 plans to be used for K-12 elementary education for public and private schools for the first time. This may be a significant benefit for those who are interested in funding 529 plans for future education purposes.
Business and Real Estate
Under the current proposal, one change that may be beneficial to business owners is the potential of taking 100% bonus depreciation on assets placed in service after 9/27/17. For example, if you buy new equipment costing $15,000 for your flip business, it may be possible to take a 100% deduction for this immediately in 2017. If you are in the market for new assets to use for your business, it can make sense to start shopping now, but hold off on making any actual purchases until we know for certain whether this tax benefit will pass and apply to the 2017 year.
For the first time in a long time there may be some great news for real estate investors. Under the proposal, we may be able to receive faster depreciation on rental properties starting as early as 2018. Depreciation of residential and commercial rental properties may both be reduced to 25 years which results in larger deductions each year. If you recently purchased a commercial property in late 2017, it can make sense to wait to place it in service until 2018 year in order to take faster depreciation next year.
A few key potential changes under the proposal for 2018 may be lower personal tax rates as well as lower tax rates for C Corporations and flow-through entities such as LLCs and Partnerships. In light of the potentially lower rates for 2018, it can make sense to shift expenses into 2017 to receive tax deductions at the current higher rates. Prepaying business expenses such as marketing fees, lease expenses, legal and professional fees may be a good move. Look ahead and prepay some of the anticipated 2018 expenses by 12/31/17 to help reduce taxes for 2017 and create permanent tax savings before the rates are lowered. Expenses charged on a credit card by year-end may be legitimately deducted in 2017 even if the credit card is not paid off until a future year.
Since lower tax rates are anticipated for 2018, it can also make sense to defer income into 2018. For example, if you are a realtor expecting a large commission check, if you don't receive your check until after 12/31/17, then the taxes may be assessed on lower tax rates if the tax proposals were to be passed for 2018.
A potential pitfall in the current proposal could limit interest expenses to be only deductible up to 30% of the business income. For example, if you own an online business with a net profit of $100k and interest expense of $40k in 2018, it is possible that you may only be able to deduct $30k of it in 2018 against your income. If this tax change were to happen for 2018, it can make sense to prepay your interest expense in 2017 since there are currently no limits on interest deductions against business income.  If it were to pass, it is unclear whether this limitation on interest expense applies to rental real estate investors or small business owners such as realtors and flippers. For those flipping real estate, it is only recommended to prepay any interest for those properties that will be sold by 12/31/17.
Another pitfall in the proposal may be the repeal of business related entertainment expenses starting in 2018. So, if you were planning on a nice holiday party or gathering for your office, it can make sense to prepay for those in 2017. Currently certain meal expenses such as food and beverage provided at an open house by a realtor can be eligible for 100% deduction. Under the proposal, it may be limited to 50% deductibility starting in 2018.
With all the potential changes, this can be both an exciting and nerve wrecking time for many of us as taxpayers. Among the variables we have in tax planning for 2017 and beyond, two constants continue to apply:
One - Getting the right numbers: Make sure your financials are up to date. Spend the time now to update your profit and loss so you know where you stand currently with respect to all of your income and expense items. Having $20k of income vs $50k of income can have very different tax strategies. Ensuring your financials are up to date helps you to accurately take advantage of any last-minute tax changes and also helps to save you from unnecessary stress come next April.
Two - Keeping the line of communications open: Make sure you keep us updated on any significant changes or transactions that occur throughout the year. By letting us know about your upcoming transactions, we can help you to make informed decisions on any considerations and take advantage of any tax opportunities that may result from any final tax changes.
Wishing you and your family a happy and safe holiday season!
Your friends at Keystone CPA "

Senior Member
Posts: 146
Reply with quote  #2 
This is really good input from your CPA.

I will be very surprised and dissapointed if they restrict interest deductions on rental properties. I think we will be fully deduct all interest paid on rental properties and not limit it to 30% of profits. A lot of buy and hold investors make no profit. Maybe the CPA was alluding to interest on loans taken for working capital for running a buy and hold RE business or interest on other such loans.

The WSJ had an article that talks about another proposal wherein small investors can only sell multi lot shares on a FIFO basis, ie we will no longer be able to select which lot of shares we want to sell (which helps to reduce tax liability). So now investors are starting to sell the lots with higher basis in the 2017 tax year just so the govt. does not tie thier hands in 2018!

Yes there is a lot of uncertainty .... The only thing that is certain is that CPA's will be making a lot more money in 2018. So much for simplification of the tax code!

Senior Member
Posts: 146
Reply with quote  #3 
I was listening to the Bruce's panel on "I survived RE". I believe Bruce asked  panel to comment on any tax changes they anticipated that might affect RE. None of the experts felt any chnages were coming (this event was held in October 2017)! 

I don't believe much thought was given to this tax bill at all. The main objective was to give corporations a big tax cut and get them to move all their overseas cash back to the USA. It has caught a lot of people off guard. Who would have thought that an attempt to restrict the mortgage interest deduction, would be made,  under the watch of a President who is so closely associated with real estate! 


Senior Member
Posts: 2,305
Reply with quote  #4 
Donald Trump hasn't built anything in decades, he is primarily a marketer of the Trump name.  He doesn't necessarily even manage some of the properties with the Trump name on it.  You can bet he wouldn't sign off on anything that wouldn't primarily benefit his business.
The tax bill is poorly drafted, opens brand new loopholes probably unintended by the drafters, etc.   Tax policy is difficult---it took 2 years to come up with a bill in 1986.  The hasty drafting of this bill is pretty evident----but the Republicans seem determined to pass something---anything---for a so-called "win".

Why does Trump like the Russians so much?  Because it is an oligarchy---one interested in investment in the West where it can launder funds and secrete them beyond the Russian state where they have been stolen from, maybe in exchange for giving Trump a Moscow property that he has been trying to obtain for decades by doing a deal with oligarchs close to Putin.  Oligarchs need to stick together, after all.  There are a series of great videos by Frontline about how Putin rose to power and how he presided over the dismantling of Russian state assets by handing them over to oligarchs in exchange for bribes to him.  It's bizarre.  Private Russian banks suggested depositing funds into their banks to earn interest----and the oligarchs then used these funds to simply buy state assets in rigged auctions.  The truth is that Putin gave lip service to democracy when he was appointed by Yeltsin---but putting him in power was a huge mistake, as Yeltsin would later admit.  When initially appointed Putin wasn't known or very popular.  Then apartment buildings in Moscow were blown up----allegedly by Chechneyan terrorists.  But the evidence was plain that Putin created a war to make himself popular---the Frontline video makes it plain that they think Russian special forces dynamited the buildings as a pretext for Putin to go to war.

The smartest thing the previous administration did was pass the Magnitsky (sp?) act to prevent the oligarchs from moving their treasure into the US or those cooperating with the act.   The problem is that Europe can't be very tough with the Russians because they need their natural gas and other resources, etc.   Only the US is in a position to penalize Russia.  If Trump suggested waiving this act----as some have reported---the Russians would agree to almost anything in exchange.

Trump's customers are oligarchs----he has gross conflicts of interest---and the current tax program was probably written on the back of a bar napkin at Mara Lago than put together sensibly in the Treasury, etc.

Senior Member
Posts: 2,305
Reply with quote  #5 

According to an accounting firm the final conference version does NOT include the changes to Section 121.

Here is what they said (dated 2 days ago):

Sale of Principal Residence. Notably, although both the House and Senate bills included proposals to limit the exclusion for gain on sale of a primary residence, the conference agreement does not propose to change current law in this regard. 

Let's hope this is correct, although everything seems to change from day to day.


Senior Member
Posts: 146
Reply with quote  #6 
I believe they also increased mortgage interest deduction for loans up to $750K. State, local and property tax deduction is limited to a total of 10K.
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