The top 5 things you need to know so your commercial real estate investment can qualify for a 20% tax deduction.
Have you heard of the 2017 Tax Cuts and Jobs Act? Most of you would answer, yes. And, buried in there is Section 199A which allows qualified taxpayers to deduct 20% of their qualified business income from their federal income tax. As a real estate investor, it’s important to know that you must qualify for 199A or lose that 20% deduction. But, if you have Triple Net (NNN) leases on your commercial properties, you may not qualify.
Here are the top 5 things you need to know as a commercial real estate investor, to make sure you qualify for the deduction.
- It’s available to:
- Limited Liability Companies
- Sole Proprietorships
- 199A deductions depend on the taxpayer’s taxable income:
- below a lower taxable income threshold [$157,500 (single), or $315,000 (MFJ) if filing a joint return], then your deductions are more straightforward
- above a higher taxable income threshold [$207,500 (single), or $415,000 (MFJ) if filing a joint return], – then you are usually excluded from this deduction
- between the lower and higher taxable income thresholds – then you may qualify for some deductions
- You must be ACTIVE in your trade or business to qualify for 199A. For purposes of 199A, ACTIVE means continuously and regularly involved and be able to demonstrate 250 or more hours of rental services each year. Rental Services can include:
- advertising to rent or lease the real estate
- negotiating and executing leases
- verifying information contained in prospective tenant applications
- collection of rent
- daily operation, maintenance, and repair of the property
- management of the real estate
- purchase of materials
- supervision of employees and independent contractors
- Because NNN Leases usually make the tenant responsible for the three “nets”: real estate taxes, building insurance, and maintenance; the tenant must be responsible for most or all of the on-site responsibilities, you as the landlord do not have continuous and regular involvement in the property
- Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners. This is important because it allows someone other than the owner to put all of that time and energy into the property. This may be necessary to meet the 250+ hour requirement and a commercial property management company can help track those required hours.
So, while 199A makes it harder to qualify for the 20% tax deduction, using a commercial property management company can help. They have the programs and procedures in place to accurately track the time spent managing your investment. This can significantly help to show that your real estate investment is an active trade or business.
* Sterling Commercial Management and Sterling CRE Advisors do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making decisions based on the information presented.