While disaster after disaster seems to be engulfing the state, there may be some relatively good tax news for real estate professionals. The IRS has just issued proposed regulations implementing “The Tax Cuts and Jobs Act.” The most interesting provision for REALTORS® is the 20% deduction for qualified business income under Section 199A of the Tax Cuts and Jobs Act. An IRS Q and A provides some straightforward answers. C.A.R. has prepared a Quick Guide and the following brief fact sheet.
The 20% Qualified Business Income Deduction; What You Need to Know (with Examples)
What is it? It’s part of the new tax law, “The Tax Cuts and Jobs Act.” It was intended to give a 20% deduction off the net business income of pass-through entities — but only if they qualify.
Are agents and brokers eligible? Yes, it’s possible. They can be eligible to take a 20% deduction off their qualified business income.
Who qualifies?
- Pass-through entities including sole proprietors and independent contractors
- If $157,500 or less in taxable income (for individual filers) or
- If $315,000 or less in taxable income (for joint filers)
What if I earn more than the threshold amounts? There is a $50,000 phase out (or $100,000 for joint filers). Beyond these limits, as an agent or broker earning commissions, you will not be eligible.
Can I take the standard deduction to reduce my taxable income below the threshold amounts? Yes. You’re not required to itemize to be eligible.
If I qualify, then I simply take a 20% deduction off my taxable income? No, you only get 20% off the amount of your qualified business income.
Examples
Example 1*: Amy Agent is single and for 2018 has commission income from her real estate sales activities of $55,000, net of her normal business expenses. Amy has no dependent children and claims the standard deduction. Here is how the 20% QBI deduction works:
| Net commission income | $55,000 |
| Business income deduction (20%) | ($11,000) |
| Standard deduction | ($12,000) |
| Taxable income | $32,000 |
| Tax | $3,650 |
Amy’s savings attributable to the QBI deduction would be $1,320 ($11,000 x 12%, since she is in the 12% marginal tax bracket).
Example 2*: Andy Agent is married to Emma Employee and they have two dependent children. For 2018, Andy earns $45,000 of net commission income while Emma earns a salary of $45,000. They have itemized deductions of $18,000, which are comprised of mortgage interest, state and local taxes, and charitable contributions.
| Net commission income | $45,000 |
| Salary income | $45,000 |
| Business income deduction (20%) | ($ 9,000) |
| Standard deduction | ($24,000) |
| Taxable income | $57,000 |
| Tax | $ 6,459 |
| Tax credit for children | $ 4,000 |
| Net tax after credits | $ 2,459 |
The QBI deduction would save Andy and Emma $1,080 ($9,000 x 12%, since they are in the 12% marginal tax bracket).
Note: The QBI deduction in this example is 20% of the net commission only. There is no QBI deduction from the salary income.
*Examples taken from NAR’s “The Tax Cuts and Jobs Act – What It Means for Homeowners and Real Estate Professionals. “