There have been some very significant changes made to the tax codes that are effective this year, 2018. In this episode, Monica is joined by Dale Carlton, Jr., who has worked in real estate since the mid-1990s and has been an attorney since 2001, about how the new tax laws affect real estate professionals, their businesses, and their clients.
The Tax Cuts and Jobs Act of 2017 provides the opportunity for people who made the same money in 2018 that they made in 2017 to see a reduction in the amount of tax they will have to pay. Currently, we all pay according to marginal tax rates — everyone falls in a tax bracket. Each of these tax brackets is going to be reduced. There will be some differences in deductions, and there is also something called qualified business income deduction — a deduction on profits.
The first thing to note is that the marginal tax rates have been lowered, and overall the amount of tax you pay on your taxable income will be a few percentage points less. Dale talks about some of the implications of this as well — there will likely be a decrease in the number of itemized deductions filed. What this means for real estate agents is that people will no longer have an advantage by owning real property as a home, because the standard deduction will exceed the amount of their mortgage interest and their other taxes owed. This corresponds to Section A on the 1040 form.
By raising the standard deduction, they removed some of the deductions we had previously. In the loss of the standard deduction, we lose some of the aspects of the deduction regarding living in the same residence for two of the past five years. They also maximized the amount you could deduct of state and local income taxes along with real estate taxes, and maximized the amount you could deduct from those groups to $10,000.
There are essentially four deductions that are still allowed: charitable contributions, home mortgage interest deduction, state and local income tax and real estate taxes combined, and then any medical expenses above 7.5% of your adjusted gross income. The $10,000 max of the state/local income tax and real estate can be added to charitable contributions, home mortgage interest, and medical expenses; if all of those added together are less than $24,000, you’ll want to take the standard deduction. If they are more, you would keep them itemized.
The home mortgage interest deduction includes your primary residence and a second home. You could write off the interest for these two as long as it was acquisition indebtedness.
The two changes that most agents need to be aware of is that they did away with personal exemptions. In 2018, there are no exemptions for any person, all are removed. They have, however, amended the rules regarding the child tax credit. They have doubled the child tax credit and increased the phase-out limit to start at $200,000 for single filers and $400,000 for married filing jointly.
For further clarification on the deduction for people who had owned a home for two out of the last five years, this is still intact in the way that we're used to it. This is the profit of a sale on a principal residence. As long as you've lived in it for two of the previous five years, you could take up to $500,000 worth of gain and not have to pay tax on that gain. This was advantageous for real estate agents and investors.
Qualified Business Income Deduction: if you have a minor that can work for you in your business, they can get paid up to $12,000 without having to pay taxes. This is also a business expense you won't have to pay taxes on. There are some rules with this deduction that will affect how we take our money. Everything changed in August — a lot of smaller business owners went to bat to protect them with these new tools. Instead of a tax bridge, you get 20% off your taxable profit, with up to a 25% qualified business deduction. If your taxable income is below the new thresholds, you will still qualify for this qualified business income deduction. Dale discusses even further some of the implications of the changes on this tax.
To make sure you are getting the qualified business deduction, you must get in with your accountant before the end of the year to make sure you're set up correctly. You will also have to set up a corporation so that you can pay part of your money as salary and receive the other part as dividends from your company.
Having your finances for your business in a separate account is crucial — you can get some good software, and you can run all your finances through the business account. Running your profit and loss for your accountant will be that much easier if your accounts are separated. Keeping better records will save you and your accountant a lot of time.
There were some changes in some of the ways business expenses are being looked at. Previously you could get a deduction on entertainment expenses, and now that is zero. There is discussion happening in regards to the 50% meal deduction in your business. Membership dues have also been removed, to social-type places.
These are tax law changes that are occurring now. Most accountants right now are still filing 2017 returns until mid-October. From the middle of October through the end of the year is their chance to get caught up on the new changes, and will begin meeting with their clients. Be patient with your accountants as they get up to speed on the new changes — they will take care of you!
About Dale Carlton
For 16 years, Dale has been representing buyers and sellers in Northwest Arkansas. He has personally sold well over $100 million in properties and constantly ranks as a top real estate agent in Northwest Arkansas. Dale spent 8 years with another company where they did over $3 billion in sales while he was an executive broker and senior vice president for the company. He has spent the last 8 years as the broker/owner of Carlton Realty, Inc. and continues to represent many of the clients he has worked with since he first started in the real estate business.
Dale is well known in the Northwest Arkansas area for taking a straightforward, direct and honest approach to real estate. His past clients will tell you that he does not like to talk fluff and is often very blunt about the market and what he feels is the best professional decision in any circumstance. Below are those things that separate Dale from other real estate agents in Northwest Arkansas.
- Licensed attorney for over 13 years
- 2015 President of the Council of Residential Specialists (the largest and most respected professional real estate designation)
- Sells between $10-$15 million in real estate annually
- Personally invests in real estate by owning multiple rental properties
- Represents a number of renovators in Northwest Arkansas, including Mark Zweig, Inc., allowing him a better understanding of the remodeling needs of homes
- Has built many homes in Northwest Arkansas
- Is respected as one of the top 20 real estate educators nationally, and is invited to speak in 20-30 states annually
- Has been a state real estate educator teaching many of the local agents their license and continuing education courses
- Consults with large real estate companies across the nation on best practices for representing clients
- Sits on multiple boards and invests his time and money into Northwest Arkansa
- Dale's website: carltonrealtyinc.com
- The Tax Cuts and Jobs Act: What it Means for Homeowners and Real Estate Professionals
- Video series: What REALTORS® Need to Know About the New Tax Law
- ePRO® certification
- Center for REALTOR® Development
- REALTORS® Conference & Expo
- Email the Center for REALTOR® Development
- More articles about the Tax Cuts and Jobs Act