piggy bank ponders tax calculations

How Do the New Tax Laws Affect Real Estate Investors?

The new tax plan may benefit investors and may offer more incentives for those interested in becoming landlords for the first time. Larger real estate investment companies, however, may be at a greater advantage than those who may rely on only one or two investment properties. There are also a few changes to the new tax laws when it comes to real estate that will help owner-occupants. Learn more about how the final tax bill may provide additional advantages for real estate investors today.

How Real Estate Investors May Benefit.

When it comes to itemized deductions, a grandfather clause allows investors who have properties before the new tax laws were passed to deduct interest to $1,000,000 of debt. Otherwise, mortgage interest is deductible for only the first $750,000 for both primary and secondary residences. While individuals will no longer benefit from making tax deductible interest payments, real estate investors can do so when such interest is used to improve rentals, or is used in business acquisition or trade.

The 1031 exchange continues. This is one way for investors to avoid the initial payment of taxes on the sale of a property by rolling gains forward when the amount is invested in the purchase of a like-kind property. Therefore, an owner may sell an investment property that has appreciated and avoid paying capital gains tax on the profit by using the funds in the purchase of a similar property.

The Section 121 exclusion stays the same. The $250,000/$500,000 exclusion that can be used on the gain from some qualified residences is still available. Individual investors or owners who have purchased a property for personal use or have resided on the property for a minimum of two years out of five may be eligible for this exclusion which can reduce taxes on the profit of a sale of an appreciated home.

Will the Tax Law Changes Affect Buyers’ and Renters’ Behavior?

There may be more changes to come to the market as owner-occupants will have less incentive to buy a home and more individuals may put off the purchase of a home and continue to rent. With the lowered mortgage interest deductions, individuals may no longer be able to take as large of a deduction as they did in the past. Property tax deductions have been changed and may impact those homes in states known for high-property taxes, such as New York, California and New Jersey. The cap on property taxes in combination with state income tax has been lowered to $10,000.

The National Association of Realtors (NAR) believes that many will find renting a better option than buying a home under the new tax rules. There are estimates that some renters could save as much as $3,408 by renting and that homeowners will need to fork over an additional $226 in taxes annually. There are a number of factors that may impact how tenants or homeowners may be individually impacted by the changes. This may push more individuals into becoming first-time real estate investors and make investing in real estate more competitive.

The Changes are ‘Business Friendly.’

The new tax bills are business friendly. The majority of investors use S corporations or LLCs when paying taxes on real estate property. Most of those who use such corporate entities will receive a 20 percent deduction on pass-through income. Some conditions apply. Landlords and flippers can take advantage, but not those in the service industry, such as real estate agents. The 20 percent deduction is one option. Investors who are juggling multiple investments or oversee a large number of employees are most likely to benefit under these changes. Corporate tax rates have also been slashed to 21 percent from 35 percent.

Questions? Seek Expert Help.

There are a lot of new calculations to consider under this new tax plan. It is best to talk to a tax expert not only to file this year, but plan your investments to take advantage of the new terms.


This article is a guest post from the following contributor:


Gary Ashton REALTOR
The Ashton Real Estate Group of RE/MAX Advantage
210 12th Ave South, Suite 201
Nashville, TN, 37203