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The 20% pass-through deduction in the new Tax Cuts and Jobs Act is one of the most complicated tax changes in history, leaving lots of room for interpretation. With this new reform, pass-through businesses, such as LLCs, S-corps and partnerships, can potentially deduct 20% of their business income, which therefore, could be a multimillion-dollar tax break. So how does this reform affect landlords, and will they benefit?
To put it simply, landlords are only eligible for this 20% deduction if they finance their properties through a pass-through business. Before you go off and get incorporated, it is important to note some other stipulations that would prevent landlords from seeing significant tax benefits. If landlords are already generating a tax loss on their rental properties due to depreciation, the 20% deduction becomes a moot point. Additionally, the limitations are $315,000 for joint filers and $157,000 for any other filer.
On the other hand, if landlords have owned their investment properties for a long time and have already recognized much of the available depreciation, the 20% pass-through deduction could be highly beneficial. If you are interested in learning more about forming an LLC to take advantage of this tax reform, see our blog post How Landlords can Form LLCs and Reap Tax Benefits.
For more landlord and investor resources, browse our Investor Resources.