The US tax code is constantly changing, and real estate investors need to be aware of the latest changes in order to minimize their tax liability. In 2023, there were a number of changes to the tax code that affected real estate investors.
Bonus depreciation
One of the biggest changes in 2023 is the phase-out of bonus depreciation. Bonus depreciation is a tax deduction that allows businesses to deduct a portion of the cost of new assets in the year they are placed in service. For real estate investors, this can be a valuable deduction, as it can offset the cost of new rental properties or improvements to existing properties.
In 2022, businesses could deduct 100% of the cost of qualifying assets placed in service that year. However, in 2023, bonus depreciation is reduced to 80%, and it will continue to phase out until it is completely eliminated in 2027.
Section 1031 exchange
Another important change for real estate investors in 2023 is the limitation on Section 1031 exchanges. Section 1031 exchanges allow businesses to defer capital gains taxes on the sale of real estate if they reinvest the proceeds in another, similar property.
In 2022, there was no limit on the amount of gain that could be deferred in a Section 1031 exchange. However, in 2023, the amount of gain that can be deferred is limited to $8 million per taxpayer. This limitation will have a significant impact on large real estate investors, who may no longer be able to defer all of their capital gains taxes on the sale of a property.
Qualified business income deduction
The qualified business income deduction (QBI deduction) is a tax deduction that allows businesses to deduct up to 20% of their qualified business income. Qualified business income includes income from rental properties, so real estate investors can benefit from this deduction.
In 2023, the QBI deduction is limited to businesses with taxable income below $345,850 for married couples filing jointly and $172,950 for single filers. This limitation may affect some real estate investors, especially those who have other income sources in addition to their rental income.
Other changes
In addition to the changes mentioned above, there were a number of other changes to the tax code in 2023 that affect real estate investors. These changes include:
- Increased standard deduction: The standard deduction for married couples filing jointly is increased to $25,900 in 2023, up from $25,100 in 2022. This increase may reduce the tax benefits of itemizing deductions, such as the mortgage interest deduction and state and local property taxes deduction.
- Increased child tax credit: The child tax credit is increased to $2,000 per child in 2023, up from $1,000 per child in 2022. This increase may offset some of the tax benefits of the QBI deduction for parents who own rental properties.
- Increased income limits for certain tax credits: The income limits for certain tax credits, such as the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC), are increased in 2023. This means that more taxpayers may be eligible for these credits.
What do these changes mean for real estate investors?
The changes to the tax code in 2023 will have a significant impact on real estate investors. Real estate investors need to be aware of these changes and plan accordingly in order to minimize their tax liability.
Here are a few tips for real estate investors in 2023:
- Consider accelerating income and deferring expenses: The phase-out of bonus depreciation and the limitation on the QBI deduction may encourage real estate investors to accelerate income and defer expenses. This could mean selling properties that have appreciated in value or deferring maintenance and repairs.
- Consider using a pass-through entity: Real estate investors may want to consider using a pass-through entity, such as an S corporation or a limited liability company (LLC). Pass-through entities allow businesses to avoid double taxation, which can be beneficial for real estate investors who have high taxable income.
- Work with a tax advisor: Real estate investors should work with a tax advisor to develop a tax strategy that takes into account their individual circumstances
Image: [US Tax Code Changes 2023]
In addition to the changes mentioned above, there were a number of other changes to the tax code in 2023 that affect real estate investors. These changes include:
- Increased standard deduction: The standard deduction for married couples filing jointly is increased to $25,900 in 2023, up from $25,100 in 2022. This increase may reduce the tax benefits of itemizing deductions, such as the mortgage interest deduction and state and local property taxes deduction.
Image: [Standard deduction 2023]
- Increased child tax credit: The child tax credit is increased to $2,000 per child in 2023, up from $1,000 per child in 2022. This increase may offset some of the tax benefits of the QBI deduction for parents who own rental properties.
Image: [Child tax credit 2023]
- Increased income limits for certain tax credits: The income limits for certain tax credits, such as the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC), are increased in 2023. This means that more taxpayers may be eligible for these credits.
Image: [EITC income limits 2023] Image: [AOTC income limits 2023]
What do these changes mean for real estate investors?
The changes to the tax code in 2023 will have a significant impact on real estate investors. Real estate investors need to be aware of these changes and plan accordingly in order to minimize their tax liability.
Here are a few additional tips for real estate investors in 2023:
- Consider using a cost segregation study: A cost segregation study can help real estate investors identify and accelerate depreciation deductions. This can be a valuable tool for offsetting the cost of new rental properties or improvements to existing properties.
- Consider using a Section 1031 exchange: Even though the amount of gain that can be deferred in a Section 1031 exchange is limited, it can still be a valuable tool for real estate investors who are selling one property and reinvesting the proceeds in another, similar property.
- Keep good records: Real estate investors need to keep good records of their income and expenses. This will help them to accurately track their taxable income and take advantage of all of the available tax deductions.
Real estate attorneys in the US should also work with a tax advisor to develop a tax strategy that takes into account their individual circumstances. A tax advisor can help real estate investors minimize their tax liability and maximize their after-tax profits.
