Section 199A: The Game-Changing Tax Deduction Every Real Estate Investor Should Know

When the Tax Cuts and Jobs Act (TCJA) was signed into law in 2017, it brought a host of changes to the U.S. tax code. Among these, Section 199A emerged as a new potential game-changer for real estate investors and developers. Here’s an in-depth look at this intriguing section of the tax law and how you might use it to your advantage.

Understanding Section 199A

Section 199A of the Internal Revenue Code provides a deduction for qualified business income (QBI). This is also known as the pass-through deduction. It was designed to offer a counterweight to the significant tax cut that C Corporations received under the TCJA. Qualified taxpayers can deduct up to 20% of their QBI from a domestic business operated as a pass-through entity. This includes sole proprietorships, partnerships, LLCs, and S Corporations.

How does QBI work in real estate?

In essence, QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. But here’s where it gets interesting for real estate professionals: if your real estate activity constitutes a trade or business, which generally means it’s regular and continuous, income from your rentals could qualify as QBI. This could mean a significant deduction and tax savings for your operation.

Real estate and the W-2 wage limitation

One potential limitation of Section 199A comes into play if your taxable income exceeds the threshold amount (which was $164,900 for single filers and $329,800 for joint filers in 2021). Once you cross this line, your 199A deduction is potentially limited based on the W-2 wages you paid in your business and the original cost of your depreciable property. This is referred to as the W-2 wage limitation.

However, real estate operations often pay minimal W-2 wages, because much of the work is contracted out. Thankfully, a significant portion of the real estate business involves the acquisition and depreciation of property, which may help to increase the 199A deduction.

But what about Real Estate Investment Trusts (REITs)?

Interestingly, dividends from Real Estate Investment Trusts (REITs) also qualify for the Section 199A deduction, without any wage or property limitation. This could be a significant incentive for those considering investing in REITs.

Key takeaways

For many real estate investors and developers, Section 199A could offer significant tax savings. But navigating this new terrain can be complex. Here are the key points to remember:

• Section 199A could provide a significant tax deduction for pass-through businesses, potentially including your real estate activities.

• The deduction might be limited based on your taxable income, W-2 wages, and depreciable property.

• If your real estate activities qualify as a trade or business and your income is below the taxable threshold, your road to the 199A deduction may be relatively smooth.

• REIT dividends qualify for the 199A deduction without limitation.

Every taxpayer’s situation is unique, and Section 199A is a complex piece of legislation. It’s always wise to seek the counsel of a tax professional to see how it might apply to your specific circumstances. With the right guidance, you may find that Section 199A offers an exciting new avenue for tax savings in your real estate business.

Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal or financial advice on any subject matter. The content of this article reflects the author’s interpretation and understanding of the subject matter as of the date of publication. Due to the complexities of tax laws and their frequent changes, the information may not apply or may be outdated at the time you read this.

You should not rely on this information as a substitute for, nor does it replace, professional financial or tax advice. Always consult with a certified professional or your own tax advisor to understand the tax implications and potential benefits for your specific situation before making any investment decisions. The author and publisher disclaim any liability for any loss incurred as a consequence of the use or application of any of the contents of this article.