5 Star Accounting & Business Solutions, LLC was graciously invited to be a guest speaker with 105.5 Money to discuss Budgeting and Mindset during the real estate segment. Budgeting is a critical task personally and professionally to avoid pitfalls in your finances and best handle emergency or ongoing decisions.
Some of the items we didn’t have time to discuss at length or at all include the following:
- Section 179: We mentioned this in the segment but I want to reiterate that now is the time to re-visit your existing approach to real-estate and your budget as a result of the Tax Cuts and Jobs Act starting in 2018. Previously, we saw restrictions on the Section 179 deductions and how that applied to residential rental properties. Those restrictions have been removed in 2018 and investors may benefit from Section 179 deductions on items you purchase or items located inside of the building. For those that don’t know…Section 179 allows you to accelerate the depreciation expense up to 100% in a given year rather than incremental deductions over 27.5 years.
- 1031 Exchange Account: A 1031 Exchange account is a great way to defer taxes (short-term or long-term gains) on property you sell. I can tell you about the tax benefits but we are not a 1031 Exchange administrator so it’s very important that you connect with an administrator to understand all of the rules. Here’s what I can summarize for you: You invest, you sell, you make $$ (ideally). Normally, you will pay short-term or long-term gains on the profit of your sale; however, you can defer these taxes by placing the profits into an 1031 Exchange account to re-invest in future properties. As long as the funds flow in and out of the Exchange, you can likely defer the taxes. The downfall is that you don’t have access to the funds for other spending so budget wisely and ensure this will fit your plans.
- Self-Directed IRA: Self-directed IRA’s seem to be a well-kept secret folks aren’t aware of. Like a 1031 Exchange, a self-directed IRA must be administered by a third party and we don’t profess to be guru’s in the plan administration itself. Be sure to connect with a plan administrator to learn more about the rules governing these plans. They are also a great way to invest in property and defer any income taxes but have a bit more flexibility in terms of other investment opportunities you may wish to run through your IRA. Yet again, the downfall is that you don’t have access to the funds until retirement age without incurring penalties and hefty tax for early distributions.
Assess your goals short and long-term then ensure that your structure fits your plan. Consider how your budget fits with your plan and talk to us or your tax advisor about opportunities and strategies concerning straight cash and cash-out investments, a 1031 Exchange, self-directed IRA’s, any combination of them and more!
- Kelly touched on this during the segment. The standard deduction rates increased in 2018 significantly. The standard deduction amounts will increase to
- $12,000 in 2018 vs $6,350 in 2017 for individuals and married couples filing separately
- $18,000 in 2018 vs. $9,350 for heads of household
- $24,000 in 2018 vs. $12,500 in 2017 for married couples filing jointly and surviving spouses
That’s a huge increase in 2018 for your standard deduction! Here’s how a standard deduction works: You get to reduce your overall taxable income by the allowable standard deduction (plus minus certain additional taxes and or tax credits) before you are assessed tax.
Example: Let’s assume that you are married – filing joint, own a home, pay interest on a mortgage, pay real-estate taxes and have some other minor Schedule A deductions (charitable contributions, medical, personal property taxes). Historically, let’s also assume that the total, average of your mortgage interest, real-estate taxes and other Schedule A deductions totaled $15,000 and 2018 is projected around the same. Under this assumption, your total deduction to reduce taxable income will be $24,000 (as indicated in the table above). Thereby eliminating your Schedule A deductions since they do not EXCEED $24,000.
Interest on the Schedule A has additionally been limited to loans up to $750,000 on qualified residences ($375,000 for married – filing separate filers). This won’t affect the average income earner or home-owner but other high-income or high-mortgage payers should be aware. There were additional restrictions on HELOC’s, home equity loans, etc. that were suspended until 2026; however, there are other restrictions in play currently that you should be aware of! You can always look for further examples about the interest deduction on the IRS website.
Check out the segment and let our associates know if we can help you with your budgeting needs, strategies or formation assistance!