21 Feb Rental property and the new tax law

Q. I own a home that I live in and also a two-family that I rent. Will I be able to deduct the entire property tax paid — $12,000 — on the rental property?
— Landlord

A. You’re in luck here.

The $10,000 cap on deducting state and local taxes — including property taxes — that will be effective for 2018 under the Tax Cuts and Jobs Act doesn’t apply to taxes paid in connection with the conduct of a trade or business, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

That part of the bill specifically excludes property taxes imposed on residential rental property from the cap.

But as a landlord, know that passive activity loss (PAL) rules still apply.

Becourtney said assuming the property owner does not meet the definition of a real estate professional — someone who devotes more than 750 hours in the year to real estate activities comprising more than 50 percent of total personal service activities — generally a loss from rental real estate will only be deductible for federal purposes if there is passive activity income to offset the loss against.

“For taxpayers with adjusted gross income (AGI) below $150,000 or $75,000 if married filing separately, there is a limited deduction available for rental real estate losses of up to $25,000 or $12,500 if married filing separately,” he said. “If a taxpayer is unable to deduct their rental loss due to the PAL rules, the loss carries forward to the subsequent tax year.”

Becourtney said upon disposition of the rental property, all suspended passive activity losses are freed up and can be claimed in the year of disposition. If net income is reported from the rental property the real estate taxes will have been fully deductible in the current year.

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This post was first published in February 2018.