The new tax law has me thinking that I should form a pass through business to take advantage of the 20% deduction. I have been reading up on the subject yet I can't seem to fully conceptualize the best way to go about it or if it is even possible. It is my understanding that I could qualify for a pass through by forming a LLC or a sole proprietorship (DBA). When I spoke to my CPA he told me that as far as he knows a qualifying LLC would have to be a partnership and that I could not form a sole proprietorship with my circumstances (I am unsure why). Is it possible for me to form a pass through business without a partner? Any links to relevant articles would be appreciated.
Here is my situation:
I am FIRE, DW works and we have two kids. I have stocks and bonds. I have a $240k mortgage on my primary residence at 3%. I have two rental houses that are paid off. One is single family, one is a duplex, and the combined income is about $30k after expenses. Our yearly gross income is around $120k but changes quite a bit from year to year. I would be happy to go into it but it doesn't seem relevant to the question at hand.
I manage the rentals myself and try to do all the repairs and maintenance. Although revenue from rental income is considered "passive income" I spend a lot of hours every year dealing with these properties so it sure doesn't seem passive to me. It makes me wonder if I should somehow compensate myself for my time and reduce my rental income by increasing my expenses. This seems convoluted and unnecessary but maybe there is an angle to forming a business that I have not considered. Historically I have preferred to keep everything as simple as possible, but the thought of having a 20% deduction is seducing me to accept some complications. I am fine with the expense of setting up a LLC or DBA if it will save me five or six thousand dollars a year for the next eight years.
The rental property fits into my overall financial strategy by providing diversification because they are real assets that are (hopefully) less correlated to the gyrations of the stock market. Now there seems to be a different opportunity because the new tax law seems like it might be a gift to real estate owners. I should note that I'm not opposed to selling the single family rental house, paying off my home mortgage (which will no longer be tax deductible for me) and using debt to buy a multifamily rental house. In other words, I would be willing to scale up a real estate business if there were a good reason for doing it.
As you can see I don't have a clear idea of what to do. Many of the pieces don't necessarily fit together, but because of the new tax law, now seems like the time to evaluate them. Am I thinking about this the right way? Are my numbers off base? Can anyone here see a strategy that would be best for me?