CPA Peter Baker, a principal of Business Planning Group in Washington, D.C., a firm that specializes in real estate agents and brokers, answers questions about 2018 taxes for real estate professionals and how they are effected by the new tax plan. (See Tip #1)
Tax Tip #2:
Most real estate professionals are sales associates and are sole proprietors. Is there any tactical reason for them to restructure themselves into an LLC or S corporation to get a better deal under the deduction?
No. From the standpoint of 199A, a change in entity type is not necessary because sole proprietorship income qualifies for the deduction. Absent other reasons to change, they should keep filing as a sole proprietorship.
What if you’re a broker or otherwise have pass-through income in addition to commissions earned?
The deduction is taken on an aggregate basis, so if you have pass-through income from other sources in addition to commissions, then you combine your qualified business income with any qualified business losses before you calculate your deduction. So, if you have $100,000 in net commission income and $50,000 in qualified losses from other sources, the 20 percent would come off the aggregate amount, or $50,000. That means your potential deduction would be $10,000.
What pass-through activities would generate losses?
Many things do. It’s not uncommon for brokerages to throw off losses today because of generous splits with sales associates. So, if you’re a broker-owner who still sells, you might have losses from your brokerage operation while generating commissions earned from your own sales.
What if you have investment rental property or you’re involved in land or property development? Those can throw off losses, right?
These are most often operated in pass-throughs, but we’re still waiting on final IRS rules. So, we don’t know yet about how net rental income and losses will be treated. [Editor’s note: NAR is working with the IRS to get clarification on that question.]
The deduction is taken on your net qualified business income. There’s no change to what counts as deductible business expenses, right?
With the exception of some new rules for depreciation and changes in deductibility for meals and entertainment, that is correct. You take out your expenses in much the same way. Did you travel to conventions? Did you buy a new car? Did you buy a computer? Did you buy office supplies?