Madison Title Agency | Madison 1031 | LeaseProbe/Real Diligence | Madison SPECS

By Daniel Kasten, CPA, CFO, MCRES

As everyone surely knows by now, Congress recently passed the Tax Cuts and Jobs Act, a tax reform law which is sure to affect most taxpayers now and in the future.  There were many changes including adjustments to the tax rates and brackets.  While the number of individual tax brackets remains at seven, the number of estate and trust brackets was reduced from five to four.  Both tax brackets have lower rates, but these changes don’t affect the special tax rates or tax brackets for long-term capital gains and qualified dividends.

There are a number of other changes in the new tax law that will have an impact on the real estate and financial services sectors, such as rules affecting depreciation and 1031 exchanges for investment and commercial real estate.  In this issue of News & Notes, we have articles that delve in detail on the effect of the new tax law in these areas. 

Beyond that, there are other changes that will also affect the real estate and finance sectors directly or indirectly.  For example, state and local itemized tax deductions will be limited, generally, to $10,000 but will apply to state and local property tax, plus either state / local income tax or sales tax, and a special provision limits taxpayers’ ability to prepay future year’s taxes in 2017.  Also, mortgage interest deductions largely remain under previous rules, but for homes purchased in 2018 through 2025, the existing $1,000,000 limitation has been reduced to $750,000.  Additionally, deductions are no longer allowed for interest paid on home equity loans from 2018 to 2025.  And, marginally related, the tax advantages of 529 plans expand to K-12 education, allowing for tax-free withdrawals of up to $10,000 from qualified education savings accounts for private school tuition.  All of these changes may affect how much people will be willing to pay for new homes and in what areas or neighborhoods they might be willing to live/buy.

There were also changes that will affect how businesses of every industry are structured.  For instance, the bill provides a tax deduction for individuals, trusts and estates who own certain businesses operating as pass-through entities.  That includes sole proprietorships, partnerships, S corporations, and most LLCs.  Taxpayers will be able to deduct up to 20% of the allocable share of qualified pass-through business income.  There will be limitations, of course.  For businesses providing professional services, like financial advisors, CPAs and attorneys, the deduction is only available if the owner’s taxable income is either $315,000 married filing jointly or $157,500 otherwise.  Also, the benefit is phased out.  It’s capped at $415,000 married filing jointly, $207,500 otherwise.  That will affect how many companies that service the real estate sector modify their business structure.

The bottom line is that it’s complicated.  This is when it is important to seek the advice of trusted advisors.  Whenever tax laws change, there are winners and losers.  The key is to leverage a Trusted Advisor’s ability to listen, reason, imagine, and proactively solve issues in order to capitalize on the opportunities and diminish the risks and pains. 

Knowledgeable CPAs, accountants and tax attorneys are able to provide tax advice and planning strategies for both businesses and individuals.  Tax attorneys may have an edge on specialized tax litigation and appeals, and issues related to liability, while the training CPAs and accountants receive in financial planning, tax regulations and codes may give them an edge in financial strategy.  And now there is a growing number of accountant-lawyers who have studied and are certified to practice in both fields. These practitioners are likely highly specialized in a particular area of tax law and, while they may charge higher rates, may be invaluable to examine unique legal issues.  The same is true of CPAs and accountants that specialize in key areas such as real estate.  They may have keen insights on how the tax law affects a taxpayer or business owner’s specific situation.