TCJA changes to RE taxes for 2019

[sol]

So, does everyone who manages rentals get to claim the 20% pass-through deduction this year?  Is there anything special I need to do to make sure I qualify?

I understand that it's not really 20%, in the case of a rental business with no employees, but the lessor of 20% of QBI or 2.5% of the unadjusted cost basis excluding the land.  So if I bought a property for 300k, and 200k of that was the structure, then regardless of how much I've depreciated since then as long as I'm still depreciating it I get to claim 2.5% of 200k as a deduction each year.  That's $5k/year, and that's on top of the normal RE deductions for insurance, maintenance, and depreciation.

My rentals aren't terribly profitable anyway, in this market, so I expect that's going to get me to zero.  Does the pass through deduction carry through to show a loss on your schedule E that can then be used to offset other income on your 1040, or is it capped at zero?  If it's capped, that would seem to suggest that a property would need to generate at least 2.5% of the cost basis more than break-even after depreciation in order to receive the benefit of this new tax break.  I'm pretty sure mine don't.

[Chiron]

Not a tax pro but I understand the deduction to only be applicable to QBI, meaning if you don't have any, it won't generate a passive loss like other deductions such as interest, insurance, depreciation, etc. 

I'm not sure what you're getting at in your last sentence.  As long as you have QBI, you can use the deduction assuming you otherwise qualify for it. Check out this article for more:

https://www.therealestatecpa.com/how-the-199a-temp-regs-affect-the-pass-through-deduction-for-real-estate-investors/

[walkwalkwalk]

My understanding is that if there is a loss, it would offset future years income for QBI deduction purposes. So keep that in mind if you're trying to take QBI deduction on a rental.

[oldmannickels]

I understand that it's not really 20%, in the case of a rental business with no employees, but the lessor of 20% of QBI or 2.5% of the unadjusted cost basis excluding the land.  So if I bought a property for 300k, and 200k of that was the structure, then regardless of how much I've depreciated since then as long as I'm still depreciating it I get to claim 2.5% of 200k as a deduction each year.  That's $5k/year, and that's on top of the normal RE deductions for insurance, maintenance, and depreciation.

These limits only exist if you are above the taxable income thresholds (157k single / 315k married)

[oldmannickels]

My rentals aren't terribly profitable anyway, in this market, so I expect that's going to get me to zero.  Does the pass through deduction carry through to show a loss on your schedule E that can then be used to offset other income on your 1040, or is it capped at zero?  If it's capped, that would seem to suggest that a property would need to generate at least 2.5% of the cost basis more than break-even after depreciation in order to receive the benefit of this new tax break.  I'm pretty sure mine don't.

It's 20% of your QBI. So if you make $100 in QBI the deduction is $20. If you show a loss on your Sch E there is no QBI deduction. The loss is deductible to a certain extent and possibly limited based on your income. The QBI loss is carried forward to next year to calculate your 2019 QBI deduction.

[sol]

These limits only exist if you are above the taxable income thresholds (157k single / 315k married)

This I did not realize, and it would certainly simplify things for us.  I'm hoping that the free tax software like taxact makes this all transparently easy, then I can worry about other things like tax loss harvesting at the end of the year.

Even being retired, I only have so much mental counterspace available to work with.  This year, I feel like some things may drop off the bottom of the list.

It's 20% of your QBI. So if you make $100 in QBI the deduction is $20. If you show a loss on your Sch E there is no QBI deduction. The loss is deductible to a certain extent and possibly limited based on your income. The QBI loss is carried forward to next year to calculate your 2019 QBI deduction.

Thanks for the clarification.  I love you guys, and oldmannickels in particular.

[oldmannickels]

This is how I remember

[walkwalkwalk]

Except the lower limit may apply. QBI on the low end is limited by taxable income. So, if taxable income is 100 and QBI is 200, QBI is limited to 100.

[sol]

I think that my rentals are going to show just a few thousand dollars in profit on the schedule E, after deducting expenses and depreciation.  Our taxable income will be much higher than that, so you smart people think we will get to exclude 20% of our schedule E profits?

It's not a game changer, but it's better than a poke in the eye.

[tralfamadorian]

I think that my rentals are going to show just a few thousand dollars in profit on the schedule E, after deducting expenses and depreciation.  Our taxable income will be much higher than that, so you smart people think we will get to exclude 20% of our schedule E profits?

It's not a game changer, but it's better than a poke in the eye.

If you're not above the 157k/315k income threshold mentioned above, yes. If you are above that income level, there's a limit depending on the property basis.

[secondcor521]

I'm hoping that the free tax software like taxact makes this all transparently easy, then I can worry about other things like tax loss harvesting at the end of the year.

By the way, taxact.com is updated for the 2018 tax year and available now, at least at the federal level.  I suspect they have made a stab at the new QBI stuff, although I didn't try that part.  You can even have it print PDF versions of your tax return with the new Form 1040 and Schedules 1, 2, etc. which I found helpful.

[kenmoremmm]

i think seattleCPA wrote about this on his evergreensmallbiz blog. my takeaway at the time was that the new pass thru rules didn't really impact small time landlords and that schedule E was already basically pass thru.

[kenmoremmm]

here's the old thread:
https://forum.mrmoneymustache.com/real-estate-and-landlording/should-i-form-a-pass-through/msg1835252/#msg1835252

[wbranch]

The issue isn't whether or not the income is pass-through. As noted in the link posted all income on Sch C, E, and F is pass-through. The issue is whether or not the rental activity rises to the level of a trade or business. That is discussed in the link in the 2nd post. Some guidance is saying if you have only one rental it probably does not qualify, if you have a few rentals they will qualify. 

[bacchi]

Well shit. You'd think that they'd have this figured out by now.

I know that H&R taxcut doesn't handle it yet.