IRS Guidance Out on 20 Percent Business Income Deduction

“On December 22, 2017, President Trump signed the “Tax Cuts and Jobs Act”.

All individual provisions of the measure are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025 unless otherwise noted. The provisions do not affect tax filings for 2017 unless noted. To read NAR’s analysis of the bill’s provisions impacting real estate, please go to “The Tax Cuts and Jobs Act – What it Means for Homeowners and Real Estate Professionals.”

NAR will be providing ongoing updates and guidance to members in the coming weeks, as well as working with Congress and the Administration to address additional concerns through future legislation and rule-making. Lawmakers have already signaled a desire to fine tune elements of The Tax Cuts and Jobs Act as well as address additional tax provisions not included in this legislation in 2018, and REALTORS® will need to continue to be engaged in the process.

NAR worked throughout the tax reform process to preserve the existing tax benefits of homeownership and real estate investment, as well to ensure as many real estate professionals as possible would benefit from proposed tax cuts. Many of the changes reflected in the final bill were the result of the engagement of NAR and its members over several years.” – NAR Tax Reform Info

The Treasury/IRS recently released its proposed regulations on the Sec. 199A 20% deduction for pass through businesses.

NAR wrote a letter to Treasury and IRS advocating that a wider range of real estate professionals should be eligible for this deduction.  NAR was successful in getting a carve-out for real estate agents and brokers.  The proposed guidance from Treasury/IRS has specifically stated that services provided by real estate agents and brokers are not considered “specified service businesses” and can be eligible for the Sec. 199A deduction above and below the income thresholds of $157,500 (single) and $315,000 (married).

NAR has also published additional information, including a Realtor Mag piece and Comm Blog that has been posted on the NAR website. To learn more, there is a series of FAQs on the IRS website that can also be shared.

Bottom Line:

This is a pretty straightforward deduction for pass through business owners making under the income thresholds.  Agents/brokers who are above the income thresholds:

This proposed guidance from Treasury/IRS is good news because real estate brokerages are not considered “specified service businesses” and can be eligible for the Sec. 199A deduction above the income thresholds of $157,500 (single) and $315,000 (married).  The calculation will depend on how your business is structured (S-corp, LLC, etc) and the deduction cannot exceed the greater of 1) 50% of the W-2 wages paid by the business, or 2) the sum of 25% of those W-2 wages paid plus 2.5% of the original cost of “qualified property.”  This is generally the original cost of the business’s depreciable property during its useful life.  This is a very basic explanation and there are other considerations, particularly if you have multiple qualified businesses. Consult your tax advisor to give you guidance on eligibility and how to file for the deduction.  NAR will release additional information about the Sec. 199A tax deduction and its impact on real estate professionals once we have done more analysis on the proposed rule.