949-392-1999
SHOW NOTES FOR EPISODE 497: NEW TAX CHANGES FOR 2020 and 2021
In the last 12 months, real estate investors had to deal with lockdowns, forbearance, eviction moratoriums, massive unemployment and other major impacts to their real estate businesses. In today’s podcast, author, real estate investor, CPA and tax strategist Amanda Han shares how new post-Covid tax changes and other potential laws could further impact real estate businesses and taxes.
What You Will Learn
- What CARES ACT laws have significantly impacted real estate investors
- AirBNB write-offs for short-term rental investors
- Retirement account investment strategies, post CARES ACT, that every investor should know
- How to offset proposed negative tax laws that could hurt real estate investors
- Will we be saying good-bye to 1031 Exchanges?
- What may happen to capital gains taxes
- Potential good news for rehabbers, flippers and BRRRR strategy investors
- How to maximize tax write-offs for 2020 and 2021
About Our Guest
Amanda Han
As both a tax strategist and real estate investor, Amanda Han combines her passion for real estate investing with her expertise knowledge in tax strategies. Her goal is to help investors with strategies designed to supercharge their wealth building using entity structuring, self-directed investing, and income offset opportunities to keep more of what they make.
Amanda has a highly rated book Tax Strategies for the Savvy Real Estate Investor on Amazon and she has been featured in prominent publications including Money Magazine, Talks at Google, CNBC’s Smart Money Talk Radio as well as BiggerPockets podcasts. Amanda and her husband Matt MacFarland have a passion for animals and founded Animals for Armed Forces, a non-profit organization that has helped to place over 1,500 shelter pets with forever homes.
Check out Amanda’s previous interview on the Old’s REI Network Podcast: 033: Tax Strategies for Real Estate Investors
More About Amanda
- 2020 was a unique year with Covid and all the changes
- Because lots of their clients are already spread out around the U.S., they were already set-up to work with clients remotely, so that was an advantage
- Stay-at-home orders didn’t impact her firm that much
- Early on in the pandemic, when others were home binge-watching Netflix, she was home binge-watching tax webinars on tax changes, updates, etc.
The CARES Act
- A lot of the changes that came out of the CARES Act for 2020 were mostly beneficial to real estate investors
- Tax cuts
- Refund opportunities
- As people are getting ready to file now for 2020, it’s important to review some of the CARES Act items, especially, if you had a difficult year
- There are a lot of opportunities available if you did have some tough issues
- One of the main changes that came out of the CARES Act is that the IRS changed the rules for what we can do with tax loses
- Starting in 2018, there was a new rule regarding losses, saying that you could only carry it forward to offset losses from future income
- The CARES Act changed that rule by saying that ,you if you had losses in 2018, 2019 and 2020, you are able to carry the losses back into previous years and effectively claim a refund for the taxes you paid in the past
- She found that very helpful for clients who didn’t have such a great year in 2020 due to:
- Tenants not paying as much due to decreased hours or losing their jobs altogether but still had expenses, carrying costs from real restate, which then created these large losses
- If you are getting ready to meet with your CPA, one of the planning opportunities to think about is whether you should carry it back and get a refund or carry it forward to offset taxes from future income
- She found that a lot of her investor clients did not have significant losses under Covid
- She found that, for her own tenants, they did not miss much in paying rents due
- She did have some clients that had AirBNB and short-term rentals that were hit early in Covid (Bill Manassero being one of those clients) but came back around fairly soon thereafter
- If you had AirBNBs during Covid, there are “bonus depreciations” you can claim if you were furnishing your AirBNBs (furniture, appliances, etc.) that are still eligible for 100% immediate write-off
- Starting in 2018, there was a new rule regarding losses, saying that you could only carry it forward to offset losses from future income
- Another significant change that came through the CARES Act was in regard to retirement accounts
- In previous years, people weren’t able to access retirement accounts until you reach retirement age
- If you did, you would have to pay taxes AND penalties
- With the CARES Act, people could tap into retirement money (up to $100,000) before the retirement age and avoid the early distribution penalties
- To do this, you just have to prove that you were negatively impacted by Covid (the government never actually defined what “negatively impacted” meant)
- Real estate investors could use the money for whatever they wanted, including investing, without penalties
- If you did this, however, you should let your accountant know before you file
- If you had a 401-K, you could take a loan (up to $100,000) against it, again if you were “negatively impacted” by Covid-19
- If you took money out but didn’t use it, you could put it back or open a self-directed account
- If you took the money out and spent it, you will only be taxed on a third of the total amount this tax season, another third next tax season and the final third in tax season three.
- You have have up to three years to put the money back into a retirement account and you can claim a refund, making it as if you never took the money out
- You need to look at how you handle these distributions strategically, for maximum tax advantage
- In previous years, people weren’t able to access retirement accounts until you reach retirement age
- Another tax change regarding charitable donation deductions for 2020 and 2021:
- You used to be able to write off 50% of your income
- It increased to 100% with the CARES Act
Proposed Tax Changes
- Most are not beneficial for real estate investors
- 1031 Exchange
- Some professionals in the tax area are saying “They will never take it away” because:
- A lot of people in Congress invest in real estate
- They want the benefits
- They won’t want to hurt themselves
- A lot of people in Congress invest in real estate
- What a lot of people don’t know is…
- In the past, you could do 1031 Exchanges for things besides just real estate (for businesses, business assets, cars used for business, etc.)
- As part of the Tax Cuts and Jobs Act
- 1031 Exchange is now only allowed for real estate
- 1031 Exchange could still be totally eliminated or limited for certain persons (i.e. people earning more than $400,000)
- There are other alternatives to the 1031 Exchange that currently exist. See: 421: Freedom From Capital Gains Tax WITHOUT a 1031 Exchange
- There are also “offset strategies”
- Sell your current property
- Buy new real estate
- Take accelerated depreciation
- Maximize write-offs where those write-offs will directly offset the capital gains
- Some professionals in the tax area are saying “They will never take it away” because:
- More Alarming Proposals
- Roll-back of unproductive or unequal tax breaks for real estate investors who make more than $400,000 per year
- Vague language is very open to interpretation
- No more depreciation???
- No more “real estate professional” designation???
- Vague language is very open to interpretation
- There’s so much “unknown” at this time that it is hard for Amanda and other tax professionals to plan and advise their clients
- It would be easier if the changes were phased in over time as opposed to happening quickly, all at once
- She is hopeful that more major issues in the economy will be addressed and that the potential proposed tax changes will have a lower priority for immediate implementation
- That would give her and other tax pros more time to plan with their investor clients as to what properties to sell, which to hold, etc.
- Roll-back of unproductive or unequal tax breaks for real estate investors who make more than $400,000 per year
- Another proposal is under the Tax Cuts and Jobs Act
- Flow-Through Entity Tax Break
- For certain types of income that you make up to the first 20% of that could be tax-free
- For example, you are a landlord and you make $100,000 of taxable rental income
- Then, it’s possible, that the first $20,000 could be tax free and you only have to pay taxes on $80,000
- When it first came out, people of higher income didn’t qualify for the full tax break
- But one proposal is to eliminate the tax break altogether
- For example, you are a landlord and you make $100,000 of taxable rental income
- For certain types of income that you make up to the first 20% of that could be tax-free
- Flow-Through Entity Tax Break
- Capital Gains Tax Proposal
- Currently, capital gains tax for a property sale range from 0% to 20%
- There is a proposal to increase capital gains rates up to 39.6%
- However, it may only apply to those who make over $1 million in income
- It’s not clear if they are referring to W-2 income, capital gains only or W-2, capital gains and all of your income
- However, it may only apply to those who make over $1 million in income
Potential Good News Proposals
- Under the Tax Cuts and Jobs Acts (the most recent tax changes), one of the biggest detriments was that they began limiting the tax deduction for state income taxes that you pay, as well as property taxes for our primary home
- The current law states that we can only write-off up to $10,000
- This hurt mostly people from states like California and New York
- There have been possible proposals to reverse that limitation
- Brand New Tax Credit – The Neighborhood Home Tax Credit
- For those who are renovating distressed properties in distressed communities
- Good for investors doing rehabs, BRRRR strategies
Tax Extensions
- She usually recommends her clients to take extensions, unless they have an urgent need for loans or other purposes
- Filing extensions give investors additional time to gather up deductions (and make sure nothing is missed)
- Especially for 2020, she is encouraging clients and investors to at least consider extensions because there are so many pending potential tax law changes in 2021
- If you file your taxes in March or April and you decided to accelerate a write-off, you claimed bonus depreciation and you wrote off as much as possible and you later find out 2021 tax rates are going to go up a lot, you may regret the accelerated and expanded write-offs. Instead, you might want to apply some of those write-offs in 2021
Be Prepared When Meeting With Your Tax Professional
- Make sure you have all your key documents:
- Closing disclosures (HUDs)
- These docs have a lot of key line item expenses you’ll need for your taxes whether you are buying, selling or re-financing of a property
- Detailed listing and breakdown of property improvements
- To maximize productions and accelerate write-offs
- All materials used in detail
- Closing disclosures (HUDs)
Last Year’s Taxes
- There’s not a lot you can do for taxes last year
- There’s not a lot you can do now than if you were planning ahead during 2020
- Take this time NOW to plan ahead with your CPA or tax advisor for 2021
- Ask what you can do now so save and reduce taxes in 2021
Buy Amanda’s Great Tax Books
How to Reach Amanda
- Website: KeystoneCPA.com
- Free downloadable eBook
- Latest tax info changes
IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast. This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement.
Check out our other podcasts at olddawgsreinetwork.com.
Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.
Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com
