The IRS just issued final rules on the 20% business income deduction (Section 199A of the Tax Code) that was part of the 2017 Tax Cuts and Jobs Act. Yes, you read that correctly. The new tax law provides you with a 20% deduction on your business income… 20% right off the top!
The rules confirm that this deduction applies if you operate as a sole proprietor, owner of a partnership, S corporation, or limited liability company (LLC). It applies even if your income exceeds the threshold set in the law of $157,500 for single filers and $315,000 for joint filers.
How it Applies to Rental Income from Real Estate Investments
Income from rental/investment properties is eligible for the deduction as long as the rental operation is part of a trade or business. Meaning you can claim the deduction if your rental activities, which include maintaining and repairing property, collecting rent, paying expenses, and conducting other typical landlord activities, total at least 250 hours per year.
How it Applies to 1031 Exchanges
Originally if income was above the threshold levels previously mentioned ($157,500 single filing or $315,000 joint filing) the amount of the deduction was subject to reduction; however, due to successful lobbying efforts by the National Association of Realtors, CCIM Institute, and other trade groups the rules were changed. Now one can use the unadjusted basis of the depreciable portion of the property to claim at least a partial deduction.
Source – National Association of Realtors, January 24, 2019
For more information it’s recommended to seek the advice of a licensed tax professional or tax/business planning attorney.