20 Percent of Your Rental Property Income Is Now Tax-Free
Now that tax season is here, I’m sure you’re looking for ways to write off as many expenses as possible, including those related to owning real estate. While a good tax accountant or attorney can help you uncover these sometimes-hidden tax benefits related to rental property ownership, so can a good property manager. Specifically, a property manager can assist with a new Trump administration law that will enable you to keep 20% of your rental income completely tax free: The Qualified Business Income deduction.
Also known as Section 199A of the Internal Revenue Code, the Qualified Income Business deduction allows both individual taxpayers and corporations to deduct 20% of their taxable profit from rental income. To take advantage of this new tax law, you will have to track many aspects of your investment, which a property manager like Mynd Property Management does. Our proprietary system tracks all tasks and how long they take, giving the client and their accountant a good view into time spent for tax purposes.
Under the new law, if a property owner has taxable rental income of $1,000, for instance, the first $200 is completely tax free. In other words, an investor only pays taxes on the remaining $800.
Who Qualifies for the New Tax Law?
Not only do individual taxpayers qualify for this deduction, but so do S corporations and LLCs. “The business must be conducted within the U.S., and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business),” according to a recent article published by Wisconsin-based Schloemer Law Firm.
This new law “should provide a substantial tax benefit to individuals with ‘qualified business income’ from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as ‘pass-through’ income,” states Schloemer.
“Property owners who track everything will realize significant tax savings from the Qualified Business Income deduction in 2019,” says Doug Brien, co-founder and CEO of Mynd Property Management. Brien is also a real estate investor with properties located all over Northern California.
Maintain Good Records to Get the Deduction
“In order to qualify, however, an owner has to maintain scrupulous records, which can be challenging for busy professionals,” explains Brien. “That’s where a good property manager and a good system, which most property managers don’t have, become essential. A property manager that utilizes technology, data and analytics as part of their management solution can easily provide you with this information, and help you meet all of the stipulations of the law.”
An owner must take these four steps to qualify for the Qualified Business Income deduction:
- Maintain separate books and records for their rental real estate activities
- Conduct over 250 hours of rental service activities
- Have contemporaneous records to document these hours and services
- Attach a signed statement to their tax return indicating that the safe harbor requirement has been met
According to a recent Bigger Pockets article, “the 250 hours of rental service activities may be aggregated amongst your eligible properties so that you may not need to meet the hours requirement for every single rental property separately.”
How to Satisfy the Rental Service Activities Requirement
Here are some of the services that are counted in the 250 total hours of rental service activities: time spent on maintenance, repairs, rent collection, payment of expenses and any other activities conducted to rent the property.
Perhaps one of the best parts of this new tax law is that the property owner does not need to perform the 250 hours of rental service activities. Instead, work done by property managers, employees, real estate agents and contractors are deductible expenses. In some cases, passive investors or syndicators also qualify for this pass-through tax benefit.
To find out how Mynd can help you reduce some of your tax burden, contact us today.