By Dale Carlton, CRS
The ever-changing tax law implications on real estate and real estate agents require constant review to monitor changes that impact real estate. Consider the following when planning for 2021 taxes.
Standard deductions
As a result of the Tax Cut and Jobs Act of 2017 (TCJA of 2017), many tax filers are now taking the standard deduction instead of itemizing their deductions. This is a result of the increased standard deduction, which goes up in 2021 to $12,550 for single filers and $25,100 for joint filers. For real estate agents, do not confuse business deductions with personal deductions when filing the standard deduction. Business deductions may still be deducted from business expenses for 2021 tax filings. Along with the increase in the standard deduction, the personal exemptions were eliminated and are no longer deductible. However, the Child Tax Credit was increased to $2,000 per child (for children under 16 by the end of the year), and income qualification limits were raised so more filers will qualify. There is a possibility of a smaller $500 credit for children who are 17–18 years old or full-time students under 24 who are dependents. The state and local tax (SALT) deduction remains limited to $10,000, which hurts filers in states with higher state taxes or high real property taxes.
The real estate interest deduction on acquisition debt is limited to the interest on a mortgage of up to $750,000 (a reduction from $1,000,000 starting in 2018 after the TCJA of 2017). This is an area to watch closely, as there are rumblings of a future reduction, and this could be under attack to help raise tax dollars in the near future.
Donations and improvements
To encourage donations to non-profit organizations, the CARES Act in 2020 allows for filers to take up to $300 in cash-type donations to nonprofits in 2020. In 2021, it gets better for joint filers who can take up to $600 in cash-type donations to nonprofits. This deduction is allowed even if the filer does not itemize deductions on the tax return.
Many real estate agents will be able to take advantage of an expanded definition of investment property improvements under Section 179. In the TCJA of 2017, improvements such as HVAC equipment, roofs, fire protection and security systems may be deducted in the first year. Speak with an accountant about any improvement to an investment property to determine which improvements may qualify and are no longer required to be depreciated over their life.
Depreciation and QBID
Bonus depreciation also allows additional opportunities for qualifying new and used property to be increased from 50% to 100% with the TCJA of 2017. This generally applies to business assets when the recovery period is less than 20 years.
One final thought is the rather significant Qualified Business Income Deduction (QBID), which began with the TCJA of 2017 and allows up to a 20% deduction in taxable business income. This amount may be limited to a filer’s taxable income if the taxable income is less than the taxable business income for pass-through businesses. This deduction has saved significant tax dollars for many real estate agents. It has some limits on higher-income earners, so it is important to work with an accountant throughout the year to determine the best methods to help ensure the deduction is maximized.
Check out the “Top Legal Issues: Don’t Be Blindsided” webinar hosted by Dale Carlton, CRS, at CRS.com/learn.
Photo:iStock.com/Marta Shershen
