Investment Property and its Tax Implications Under the New Tax Plan
Understanding the tax repercussions associated with investing in rental properties, especially under new tax plans, is of critical importance. Here is what you should keep in mind before purchasing property for rental purposes under these new plans:
Changes to Mortgage Interest Deductions
The new tax plan has made changes to how mortgage interest can be deducted for rental property investments. You still qualify to deduct some or all of it depending on both filing status and mortgage amount; just how much depends upon which factors.
Depreciation Rules for Rental Properties
Depreciating rental properties is an invaluable tax benefit that allows owners to account for wear-and-tear in annual deductions from value. Under the new tax plan, depreciation can occur over two and seven- to five-year cycles for residential properties while 39 years for those owning commercial ones.
Pass-Through Deduction
The new tax plan introduces a pass-through deductibility that permits owners and managers of pass-through businesses, such as rental property ownership, to deduct up to 20 percent of their business income from taxes as an itemized deduction with certain restrictions and a phase-out threshold based on income levels.
Capital Gains Tax Changes
The new tax plan has not made significant changes to capital gains taxes on investment property sales, making it critical that you understand their rules and how they might impact your tax liability.
Qualified Business Income Deduction
The new tax plan introduces the Qualified Business Income deduction (QBI), enabling eligible taxpayers to deduct up to 20% of qualified pass-through company and rental income as tax. There are certain restrictions and phase-out thresholds based on income levels for this deduction.
State and Local Tax Deductions
The new tax plan limits the deduction of state and local taxes (such as property taxes ) at $10,000, potentially impacting overall tax advantages associated with owning rental properties in areas with high property tax burdens.
Consultation from Tax Experts
Given the complexity of today’s tax system and its implications on rental property owners, consulting a financial or tax advisor before purchasing an investment property can be especially advantageous. You will work together with them to understand any tax ramifications as well as develop strategies designed to optimize benefits.
Before purchasing an investment property to rent out, it’s essential that you carefully assess its tax repercussions. Understanding changes to mortgage interest deduction and depreciation rules as well as any provisions which might impact financial and tax outcomes will enable you to make informed decisions and stay compliant with current legislation while optimizing tax benefits from ownership of rental properties. Speak with a tax expert if possible to maximize benefits while being compliant.