As I understand this, the provision was originally intended to stimulate job creation… now, after some creative editing, it does not. What it stimulates is accumulation of property in the hands of a few while throwing a crumb or two to folks like bus and NRE. 
This is an insult to every landlord like H who work endless hours to maintain and administer their properties. I’m hoping whatever this provision is that it will apply to us, but that’s far from clear right now.
You think landlords don’t work? All they do is sit around cashing rent checks? If it’s so easy and so lucrative, why aren’t you out there buying rental properties as fast as possible? 8-|
There are any number of reasons why this won’t benefit small landlords. Here’s two:
- most small landlords operate at a loss for tax purposes. No profit, no deduction
- the IRS doesn't consider rental property to be a business for most small landlords. It's an investment. That's why they use schedule E instead of schedule C, and don't pay FICA on the profits. You can't just say "my rental is a business" like you can with most other self-employment activities. No business, no deduction.
I already pointed out where in the House plan that they tax-advantaged capital intensive businesses. The final bill accomplishes it by different means.
Haven’t you been complaining bitterly about how easy it will be for high-income people to convert their income to business income and get a lower rate? The bill attempts to control this by limiting or eliminating the deduction for high-income people who have a business in name only. If you don’t have employees, if you have no investment, if all the revenue is directly due to your own labor, then you don’t have a business with actual substance, and therefore are judged not worthy of getting a break.
I have no doubt that many landlords work hard, but it’s always been strange that “earned income” is taxed higher than other forms of income. While we don’t want to heavily tax Grandma’s meager savings account interest, why is the highest bracket for interest and dividend income 20%? You could make millions that way. Some people do.
Because generally the companies paying out interest and dividends have already paid taxes on these profits, and charging a lower rate helps to mitigate the double taxation.
There have been times that we’ve busted our butts as landlords. The amount of effort to clean and fix up units that people have trashed has sometimes come at a loss of time and money. It’s a risk, and there have been times that it has not been rewarding at all. Unfortunately we haven’t been able to sit back and just collect the checks rolling in for much of the time we’ve rented. Our tenants do tend to stay because we keep the rent below market value and come running any time they have an issue. It is most certainly a business.
But I also am not crazy about how earned income is taxed. Why should people be taxed up to 39.6%, plus Obamacare penalty and some pay state taxes that can add up to over 50% for their labor? And this is the amount that we have been taxed on our rentals, too.
Well, I can tell you that my husband’s heart surgeon makes a LOT more for his time than we ever got for our rentals. And he’s worth every penny.
But if we’re going down the road of whom is more worthy of tax breaks, it can get pretty complicated. Shall we tax the heart surgeon at a lower rate than the plastic surgeon who only does cosmetic work?
I’m just trying to filter out the truths from the bs. Not making a judgment upon what tax break is more worthy than another, but what “fact” is the truth, and what is just being used as spin.
busdriver - I bet some landlords pay themselves a salary for that work, rather than hiring a property manager. I’m not sure what the tax ramifications of that would be for you.
Being able to pass-through at a 20% rate instead of paying 39.6% would end up being at least a 9K tax break yearly for us. A crumb of some significance, I think.
But I’m not a fan of Corker. There’s some slimy things coming out about him. I would like to figure out if this is truly a sneaky bribe to get him to sign off on the bill, or if people are opportunistically jumping on this explanation.
Yeah, I’m not sure. We file it on our personal taxes and we don’t have a manger, so we pay for all profits at our tax rate. Unless it’s beyond my husband’s skill set, we do all the work ourselves. I don’t know that paying ourselves a salary would be any different.
^Not in the current code, at least, since you would declare the salary on one line and the deduction for the cost on another one, both of which currently have the same tax rate.
Certainly not the case for us. It was once upon a time.
“Being able to pass-through at a 20% rate instead of paying 39.6% would end up being at least a 9K tax break yearly for us. A crumb of some significance, I think.”
Taxation is supposed to do 2 things: raise revenue and/or stimulate certain beneficial things like job growth. This provision does none of the above. So it gives you $9k and gives some others millions… no revenue raised. It does not stimulate any job creation or job number maintenance either as it (together with other provisions) simply shifts real estate ownership from homeowners to big landlords.
So then there should never be any tax decreases unless it stimulates certain beneficial things, because it lowers revenue? Supposedly the point is to put more money into people’s hands, they will spend it and improve the economy. Why not just raise taxes to 100% on everyone (except for whatever beneficial causes are deemed), and only allow people to keep what someone in charge thinks they need? Or deserve.
It’s a philosophical issue. There are people that think all money belongs to the government, and we should get to keep what some powerful government official allows us to. Others think that the government is a necessary evil, that should get the minimum of what it needs.
I am in the middle. I don’t support large tax breaks for wealthy people, at the cost of increasing the deficit, but I understand some of the philosophy behind it, that you don’t penalize people for doing well. And yes, some of the philosophy behind it for both sides has been pleasing their donors.
I don’t know if this is globally true. On our properties there are some big-ticket items we’d like to take care of, if we got a significant tax break we’d be able to move up the timetable on these by quite a bit. That would put that money back in circulation. If it gives a lot, maybe you are buying/fixing up more buildings.
Anyway, under this bill pass-through income doesn’t have its own rate. You get up to a 20% deduction of the qualified business income, and then you pay at whatever incremental rate you are at. So if you are in the 37% bracket, your pass-through income would be taxed at at least 29.6% (if you can take the whole 20% deduction).
“So then there should never be any tax decreases unless it stimulates certain beneficial things, because it lowers revenue? Supposedly the point is to put more money into people’s hands, they will spend it and improve the economy. Why not just raise taxes to 100% on everyone (except for whatever beneficial causes are deemed), and only allow people to keep what someone in charge thinks they need? Or deserve.”
I think you are missing the point. At a small business level, that provision will be generating some growth, definitely. But the perks should be phased out for the mega RE holdings as they do not do any meaningful benefit. Do you think Corker will plunk his $1.1М annual saving into renovations like you would do with your winAs written originally if we can call it that :), the provision was supposed to give preference to small guys.
I think the word ‘land lord’ is triggering speech for some people. The assumption being it refers to an elite class of snooty people who spend the day eating grapes peeled by the poor overworked unwashed masses.
I could spend pages going into the day to day WORK involved with running a rental business. Not a side line, but a full blown business - which you hope funds your day to day bad habits. But that explanation would do nothing to change the view of those enjoying a good case of self configured class envy.
In the tax legislation, will charitable donations still be deductible? I am thinking about going ahead and sending in the donations that I would normally be making in the spring.
I think charitable donations are still deductible IF you itemize, but fewer people will be itemizing.
There is one big reason I do not own rental property, and that’s because I don’t want to be a landlord! It is hard work!
Not only are capital gains and dividends generally taxed at 20%, but if you are in the current 10% or 15% bracket for earned income you pay zero tax on dividends and capital gains! So the guy who works and earns $35k pays much more taxes than the guy who works and makes $25k but has $10k in dividend income. They both have income of $35k.
If this tax bill passes this week, it doesn’t affect our tax returns we file next year, right? All these changes go into affect for tax year 2018. Just wanted to confirm that because I heard talk on the radio today that made it sound otherwise.
What you file in April is this year using this year’s law.
If you are making estimated payments like we do it will be based on the new legislation.