Tax Law Changes That Affect Real Estate

These are the major parts of the recently passed tax reform legislation that affect real estate investment:

Passive loss provisions prevent investors from deducting losses on real estate partnerships from other income. That means investors cannot deduct these losses from the money earned at their primary jobs or from their portfolio income. They can deduct such losses only from other real estate profits.

There is an exception that allows a deduction of $25,000 in passive losses against “active” income if the taxpayer actively manages the real estate and is not a limited partner. This exception applies in a more limited way to upper-income taxpayers.

The depreciation schedule is extended to 27 1/2 years, up from 19 years, on residential rental property.

The 60% capital gains exclusion is abolished. So profits from the sale of properties will be subject to the taxpayer’s highest tax rate, up to a maximum of 28%, compared with the current top rate for capital gains of 20%.

Stricter standards will be applied to computing the alternative minimum tax, likely further raising the taxes paid by real estate investors.

All limited partners can take the deduction only to the amount they are at risk. These rules are tightened so that property owners can deduct losses and take depreciation only to the extent they are at risk. This provision is aimed at holding down the inflation in property values based on seller financing.