Real Estate Alert: Tax Reform Measures You Might Have Missed

By Michael Siino |  Alan M. Blecher  |  December 10, 2017

As tax reform has been making its way through the House and Senate, and now to a conference committee of negotiators who will attempt to reconcile the differences between the two bills, the Marks Paneth Real Estate Group has been monitoring and advising on the changes that would impact our clients the most. 

While there are many provisions in the tax reform bills that would affect the real estate industry, there are quite a few that are not making the headlines. Real estate business owners should take careful note of these easily overlooked changes, such as:

Under the Senate bill, the deduction that would be available to individuals is increased to 23% of domestic qualified business income (from 17.4%). The deduction would generally be limited to 50% of the taxpayer’s allocable or pro rata share of “W-2” wages paid by the business. So, if the partnership, S corporation or sole proprietorship does not pay any “W-2 wages,” the taxpayer would not be eligible for this new deduction. However, this wage limitation would not apply if the taxpayer’s taxable income is $500,000 or less for married taxpayers filing jointly, and $250,000 for other taxpayers. The wage limitation would be phased in for individuals with taxable income exceeding these amounts.

Special rules apply to taxpayers with pass-through income from specified service businesses. These include any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees. Such taxpayers are not eligible for the 70/30 safe harbor treatment under the House bill. Under the Senate bill, the deduction for domestic qualified business income would only apply to taxpayers in these specified service businesses if their total taxable income is $500,000 or less if married filing jointly, or $250,000 for other individuals. Special income phase out rules would apply to taxpayers with total taxable income above these thresholds.   

The Senate bill – but not the House bill - contains a provision that would severely limit the ability of taxpayers (other than corporations) to utilize active trade or business losses against other sources of income (such as salaries, fees, interest, dividends and capital gains). “Excess business losses” – defined as the excess of aggregate deductions attributable to the taxpayer’s trades or businesses over the aggregate gross income or gain from such businesses – greater than $250,000 ($500,000 for joint returns) would be disallowed. Instead, they would become a net operating loss in the subsequent year, subject to the rules applicable to net operating losses. The active business limitation would apply at the partner or S corporation shareholder level.

About Michael Siino

About Alan M. Blecher