20% Pass-Through Deduction The Tax Cut and Jobs Act includes a tax deduction of 20% of your rental income if: • You are a sole proprietor, LLC owner, or partner in a partnership. • Your total taxable income is under $170,050 (single) or $340,100 (married). If your income exceeds these amounts, you may still be eligible for a smaller deduction, but the deduction can’t exceed 25% of the W-2 wages paid by your business plus 2.5% of the original purchase price of your rental property. • You perform 250 hours of rental duties each year. • You keep separate records showing income and expenses for each rental. Section 179 Expensing and 100% Bonus Depreciation Rental owners can immediately deduct the entire cost of certain business equipment used in rental activities in the year they are placed in service using Section 179 of the Tax Cut and Jobs Act (TCJA). To qualify, the rental owner must regularly work with the operations of the business. It’s okay if you have employees helping you out, but you must be able to show you are actively involved too and that it is not simply a passive investment. You can deduct tangible personal property such as kitchen appliances, computers, phone equipment, or other furnishings that have a useful life of no more than 20 years. 100% bonus depreciation is available for property placed in service through 2022 (the rate used to be 50% prior to the TCJA). This bonus depreciation will be phased out by 2026. Let’s say you spent $20,000 on kitchen appliances for your rentals in 2021. Normally the appliances would be depreciated over a period of 5 years, but with the 100% bonus depreciation you can expense the full $20,000 this year.
2021-2022 2023 2024 2025 2026 2027 and beyond
100% 80% 60% 40% 20% 0%
Capital Gains Tax Deferment These are just a few tax strategies available to rental property owners. Of course, deferring capital gains taxes when selling your rental property is another big one, which you can read more about on page 10 and page 41 of this issue. As with any tax strategy, consult with a licensed tax professional for advice.
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