What You Missed December 2018 General Meeting
Save Money, Protect Assets, Lower Taxes—and the Top 5 Questions Real Estate People Ask
Jerry Davies, CPA, of Davies & Kerr
“Last year I told you there were not a lot of changes, but this year there are a bunch,” advised Jerry.
Jerry introduced the topics to be covered:
- New tax law changes this year
- Asset Protection/Entity Selection
- Retirement Planning
Jerry began with, “In 2008 they made a lot of changes and made it easier to invest for your retirement.”
Here are some of the tax law changes:
Alimony - You could always deduct alimony until 2018, but no more. You cannot deduct it or claim it. Prior agreements are grandfathered in unless there are any modifications.
Disaster losses are no longer deductible unless it is a National Declared Disaster. But if you have money in an IRA you can use it for nationally-declared disasters, like Katrina or the California fires.
Tuition monies in your IRA can now be used for as low as grade school for your children.
Moving expenses are no longer deductible, except if you are in the military.
Jerry explained, “They are trying to get rid of the excess laws that can be manipulated and massaged for more deductions.”
Standard deduction is doubled and 70% of the people already qualify for standard deduction.
Property taxes are limited as a deduction.
Mortgage deduction for primary residence is limited to only one and under $750,000. No HELOC loan interest is deductible (second mortgages).
Charity deductions now must have receipts and are limited to 60% of your income.
Miscellaneous itemized deductions are gone. As a W-2 employee, you lose the deduction for any unreimbursed expenses, travel, clothing, etc. It has not gone into play yet, so no one has felt it yet, but it seems to be unfair. You can change to an independent contractor and file a schedule C and get the deductions back. Investment fees for consultation are no longer deductible.
Dependent exemptions are gone but you get a $500 credit for dependents, and your child credit doubled to $2,000. Usually teens earn around $5,000 or so and pay little tax, so you can hire your kids.
Starting in 2019 you will not pay a penalty for not having health insurance. The mandated purchase has been revoked.
Estate and gift tax doubled to $10 million for each parent. If under that, then no tax is due to the heirs. If it is an instrument, like an annuity, you would have to pay the same tax as the deceased.
For a Net Operating Loss, 80% is not carried back, but you can carry forward until death. There are different types of losses. Capital losses can be taken up to your gains plus $3,000.
Any qualified business income will be a pass-thru deduction, i.e., with a single member LLC, a partnership, or an S corporation, you get a 199A deduction of 20% for all the income from your entity right off the top. That is below normal taxable income. If your taxable income is higher than $140,000, we need to do something else. You just deduct the 20% from all the income and pass it through to your personal tax return.
Meals and entertainment: meals still 50%, but no entertainment expenses are deductible.
Corporate tax rate lowered to 21%, from $35% in the past. Good to have a C corporation.
Some things we do in real estate are taxed in a different way.
“The tax codes are primarily a redistribution of wealth,” he advised.
You can’t deduct any losses in your IRA, since it is a retirement program.
If you are a W-2 employee, your employer is paying half of your FICA and Medicare payments, but as a 1099 contractor you must pay both halves.
Asset protection: You don’t generally want to put real estate in your own name. Real estate is governed by state statute. You put properties in land trust, or some other entity. You can take seminars or workshops to learn how to do that easily.
Getting insurance is a necessity: property, casualty, and an umbrella policy.
The different types of income are important to discuss. You can set up an LLC or C corp depending on what you want to do: wholesaling, rentals, etc.
If you buy, fix and sell properties, it is considered producing ordinary income and is taxed as normal income. Rental properties produce rental income, but then when you sell them, you pay capital gains at a lower rate.
When you sell an asset in less than a year, it is considered a short-term capital gain; over a year, just capital gains of 21%.
If you live in a house for two years out of the last five and sell it, you will get a $250,000 capital gains exemption for one, and $500,000 for two.
Other types of income are portfolio: interest, dividends and rents. They are all taxed differently.
You can create a single-member LLC and file a schedule C to get your deductions. You can join with a partner and start a multi-member LLC and file a partnership form to get more benefits.
For wholesaling, you might want to be a subchapter S corporation. It will allow you to turn your ordinary income into portfolio income and pay less in taxes. That way, you only get taxed at one level instead of normal C corporation where you are double taxed.
You should do flips in a subchapter S corporation and rentals in a multi-member LLC.
Set up a single-member LLC, buy the house in a land trust and name the LLC as the beneficiary. “One of my larger clients puts five land trusts in one LLC and then they start another LLC,” he informed us.
SEP, IRA, ROTH, and 401(k) are all types of self-directed retirement accounts. Usually, 20% is what you put in and 80% is what accrues. In a ROTH you pay tax on the seed and not the crop. You get to take out the money tax free.
If you have a 401(k) and it has over $250,000 in it, you have to file a tax return for the 401(k).
Jerry advised, “Consider selling properties in an installment plan or a 1031 exchange to save on taxes.”