Hie Thee to a CPA

As we noted in February re the Tax Cut and Jobs Act (TCJA)

One of the most beneficial--and complex--provisions is the deduction for pass-through income, which applies to small-business owners like your humble blogger, but only if business affairs (these days the adjective is necessary 😀) are structured properly.

We had hoped that clarity would have obtained by now, especially for small landlords whom we know. The answer to the following question indicates little progress has been made.

(Image from Green Bush Financial)

I hope to get the new 20% deduction for “pass-through” businesses that report profits on individuals’ tax returns. Does my income from rental real estate qualify?

We just don’t know. In general, owners of businesses organized as proprietorships, S-corporations, and partnerships now get a deduction of 20% of the business’s income—if the owner’s taxable income is $315,000 or less for married couples ($157,500 or less for singles). Above that level, there are complex rules as to who gets a break.

The problem for millions of landlords of all sizes is determining whether their rental income is from a business or an investment. If it’s investment income, then it doesn’t qualify for the 20% break, even if the landlord’s income is below the $315,000/$157,500 threshold.

Anthony Nitti, a tax specialist with Withum, says, “A century of case law hasn’t clearly defined when a rental rises to the level of a trade or business. Now, landlords across the country will somehow have to make that determination.”

As is typical of new tax laws, the complex questions have not been answered by the IRS--and may not be by April 15, 2019. If real estate comprises more than a few thousand dollars of your income, dear reader, get some professional advice.