Real Estate Tax Advantages

I.R.C § 199(A)

The Qualified Business Income (QBI) Deduction, also known as the Section 199A deduction, is a tax deduction created by the Tax Cuts and Jobs Act (TCJA) in the United States. It allows eligible business owners to deduct a portion of their qualified business income from their taxable income, reducing their overall tax liability. The deduction is designed to provide tax relief to pass-through entities, such as sole proprietorships, partnerships, S corporations, and limited liability companies (LLCs), as well as some qualified real estate investment trusts (REITs) and publicly traded partnerships.

Here are some key points about the Qualified Business Income Deduction:

1. Eligibility: To qualify for the QBI deduction, you must have income from a qualified trade or business. Certain specified service businesses, such as those in the fields of law, healthcare, accounting, and consulting, may have limitations or restrictions on their ability to claim the deduction if their income exceeds certain thresholds.

2. Deduction Amount: The deduction is generally equal to 20% of your qualified business income, subject to certain limitations. The deduction can be taken on your individual income tax return, reducing your taxable income.

3. Income Limits: For taxpayers with taxable income below certain thresholds (which are periodically adjusted for inflation), the QBI deduction is generally available without any limitations. However, for high-income taxpayers, there may be limitations and phase-outs based on income and the type of business.

4. Specified Service Trade or Business (SSTB): If your business falls into the category of a specified service trade or business (SSTB) and your income exceeds certain thresholds, you may be subject to limitations on your QBI deduction. SSTBs typically include professional service businesses where the income is primarily derived from the skills or reputation of the owners or employees.

  • Here are some examples of SSTBs:
    • Healthcare Services: This includes the practice of medicine, dentistry, optometry, chiropractic services, and veterinary medicine. Essentially, businesses involved in providing healthcare services are considered SSTBs.
    • Legal Services: Law firms and legal practitioners offering legal advice, representation, or consulting services fall under the SSTB category.
    • Accounting Services: Accounting firms and individual accountants providing accounting, auditing, tax preparation, and related services are considered SSTBs.
    • Financial Services: This includes businesses involved in managing investments, providing financial planning, or offering brokerage services. Hedge funds, investment advisors, and similar businesses may be SSTBs.
    • Consulting Services: Businesses providing consulting services in various fields, such as management consulting, strategy consulting, marketing consulting, and other advisory services, are generally considered SSTBs.
    • Actuarial Services: Actuaries who provide services related to assessing and managing financial risks are categorized as SSTBs.
    • Performing Arts: Individuals or entities engaged in performing arts, including actors, singers, musicians, and other performers, may be considered SSTBs.
    • Athletics: Sports professionals, coaches, and trainers who derive income from their athletic abilities or expertise fall under the SSTB category.
    • Financial Trading or Dealing: Businesses involved in trading financial instruments, such as stocks, bonds, commodities, and derivatives, are often considered SSTBs.
    • Investment Management: Firms or individuals managing investment portfolios or funds, such as private equity, venture capital, or mutual funds, can be categorized as SSTBs.
    • Any Trade or Business Where the Principal Asset Is the Reputation or Skill of One or More Employees or Owners: This catch-all category includes businesses where the primary source of income is the reputation or skill of the people running the business. This can encompass a wide range of professions, such as celebrity endorsements, social media influencers, and similar enterprises.

5. W-2 Wages and Property Limitation: In some cases, there is a limitation on the QBI deduction based on the greater of 50% of the W-2 wages paid by the business or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property used in the business.

6. Aggregated Businesses: Taxpayers with multiple qualified businesses may be able to aggregate them for the purpose of calculating the QBI deduction, which can be beneficial in certain situations.

7. Reporting: The deduction is typically claimed on Form 1040, Schedule C (for sole proprietors), Schedule E (for owners of pass-through entities), or Schedule F (for farmers).

     

    Note:

    It’s important to note that tax laws are subject to change, and eligibility for and calculation of the QBI deduction may vary based on individual circumstances and any updates to tax legislation. Therefore, it’s advisable to consult with a tax professional or CPA to determine your specific eligibility and the exact amount of the deduction you may qualify for.

    TIP

    With effective estate planning, investors can avoid the taxation of non-dividend distributions altogether by passing their real estate investment(s) to their heirs at a “stepped-up” cost basis equal to fair market value of the real estate at the time of death. Beneficiaries therefore, can sell the real estate with no tax consequences on the appreciated value, or continue to hold and receive income.

    Non-Dividend Distributions:

    Due to the non-dividend distributions described above, when the investments in the professionally managed real estate fund/REIT are sold, the deferred tax portion must be paid. Depending on the length of the holding period, the tax liability may be converted to long-term capital gains. Since long-term capital gains tax rates are traditionally lower than most current income tax rates, investors still benefit upon sale as they are likely to have reduced their overall tax liability.

    199A Dividends:

    Created by the 2017 Tax Cuts and Jobs Act, Section 199A dividends (Qualified Business Income Deductions) include those paid from REITs and professionally managed real estate funds that own REITs (including private REITs) that reduce taxable income through a 20% reduction in the taxes owed on REIT/real estate fund dividends. The real estate component of the deduction equals 20% of the combined qualified REIT dividends (including REIT dividends earned through a regulated investment company (RIC)) and qualified PTP income/(loss). The tax benefits can be reflected in reductions to both ordinary income and capital gains.

    1031 Exchange:

    Section 1031 of the IRS code is a popular and powerful capital gains tax deferral mechanism. Many real estate investors have benefitted from appreciation in their direct real estate holdings. By following a set of pre-specified IRS rules, these investors may sell their existing real estate while simultaneously investing all or a portion of the capital gains into an exchange property of greater value (a like-kind exchange). This allows individual investors to grow their direct held real estate portfolios while deferring the payment of capital gains taxes and depreciation recapture.

    Institutional Real Estate:

    – A Worthy Component of Individual Investment Portfolios –

    The tax implications of various competitive investments are key in establishing allocations in individual investor portfolios. Investment real estate is one of the few asset classes that can boast attractive income, capital preservation and appreciation, as well as multiple tax benefit opportunities and combined, form a critical investment rationale for the asset class.

    This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal or accounting advice. You should consult your own investment, tax, legal and accounting advisors before making any investment. This is not intended to be an offering of securities. An offering is made only by a Prospectus.




























































    NOTICE

    You are now leaving DST1031HQ and entering the marketplace site, PrivateCapitalHQ. By proceeding, you understand you are subject to the terms and conditions of PrivateCapitalHQ.com found in the Disclosure.