I'm excited to introduce my friend and my CPA, Eric Freeman,
as an official KenMcElroy.com advisor.
Eric and I have been working together over the years and he's personally
helped me with the 1031 exchanges, partner buyouts,
cost segregation studies and many, many other complex transactions.
Not only is Eric great at what he does, but he's also able to break down
very sophisticated subjects and make them very easy to understand.
I've learned a lot from Eric.
And so will you. You'll see a lot of videos
featuring Eric's expertize on YouTube and mini courses.
And in my premium membership, Eric.
Welcome to the KenMcElroy.com family.
Welcome back, everyone.
There's been a lot of talk with any new administration.
We're always looking at the new tax proposals.
So today we're going to look at some of the proposals that really we had learned
about these back in December and earlier on during the election.
And now we actually have them in proposal form.
And so some of these are actually likely to happen.
So today I'm going to cover
five of the big ones that may affect real estate in general.
Of course, there's a lot more to impact than this.
So I encourage you to reach out to your CPA or other advisor
if you think there may be something that will affect you.
So the first one that we're going to talk about is the ordinary income rate.
So this is income from things like your wages.
Maybe it's from interest or other types of investment income.
They're all going to be taxed at this ordinary rate.
Currently, it's thirty seven percent.
The proposal is that we would
increase this now to thirty nine point six.
Doesn't seem like a lot. A little under three percent.
But along with some of the other changes that we could see,
it's going to really start to make a big difference.
The next big change is that the capital gains rates.
So right now, capital gains just real briefly, so we understand
this is when you hold an asset
for more than one year and you sell it.
You receive this preferential tax rate on that income.
So instead of paying the ordinary income tax
that we just described in the previous slide,
you may get taxed at either
zero percent, 15 percent.
Or 20 percent, 20
being the highest one that we're looking at right now.
Now, what they want to do, or at least the proposal that's currently
floating out there, is that they would increase it
to a top rate of 25%.
So this could have a big effect if you're thinking about
or already in a transaction to sell something.
You may want to consider trying to get it done before the end of the year.
In fact, this one, as it's written now,
will actually be effective as soon as the act passes,
which could be as expected to be before the end of the year.
So there's definitely something you want to watch out for,
because just right off the bat, this is a 20 percent increase
in your tax liability.
So if you can take advantage of this 20 percent rate now, it's
definitely worthwhile.
The other one and this one
you might not have heard of as much, but it definitely affects a lot of people.
It's been around for about a decade now, but this is the net investment
income tax or short.
We just call it the net tax.
Not me, because it's really not.
So the net tax previously
this only applied to investment income.
So this was typically your interest or dividends or capital gains.
And if you were not a real estate professional,
it could apply to your real estate income.
But a lot of times, if you're active in real estate
and you're able to make, you know, take advantage of some of the elections
that are available to real estate professionals, you could avoid this tax.
But what this is, is it's essentially another two point eight
percent tax on top of whatever rate that you're already paying.
So this is either your ordinary income rate that you're already paying
as it stands now, 37%, or your capital gains rate of 20%.
You add on this two point eight percent
if you add income, that was subject subjected to it.
So the big change here that you want to pay attention to
is it's no longer
should it be called net investment income tax anymore, because it will apply
to real estate, because it's going to apply to trades or businesses,
which really this means operating businesses as well.
You know, think of any retail store, dental practice lawyers, you know,
would potentially be subject to this if you hit the income thresholds.
And so this is a big change for real estate and some of them
to keep on mind. You have to budget for this increase.
So when you hear the ordinary rates, the capital gains rate,
know that you may actually be paying more than that.
So definitely something to keep your eye on.
The next one is what is referred to as a 20 percent deduction.
Now, the technical name for this is really the qualified business income deduction.
And this was part of the Trump administration
when we received those new set of tax laws.
And essentially what this was, was to level
the playing field for smaller businesses.
So, as you might remember, they had lowered the corporate
tax rate from what it was previously to a flat.
Twenty one percent.
So in order to give that similar benefit to the smaller businesses
that are organized as partnerships or as corporations,
which is a significant portion of the businesses
as you're driving down the street, are probably organized in that way.
And that includes real estate.
If you own rental real estate, a lot of times it's being held in an LLC
that may be taxed as a partnership.
And so you would get this deduction on your real estate income.
And effectively, it had the benefit of lowering your tax rate.
So if you took 20 percent, just essentially a fake deduction.
Think of it as a fake deduction.
So you made one hundred thousand.
You'd get to deduct 20, even though it's not a real expense,
you'd only get taxed on 80, which is the difference.
So the change is that currently there's
no limit to how big that deduction can be.
Now, there are other limits that may change, whether it is
20 percent or some other percentage, but there's no limit to once
you've done that calculation as far as how big the deduction can be.
What they want to do or what's proposed currently is limiting the deduction.
So married filing joint is what MFJ stands for.
So if you're married and filing with your spouse,
you can only take a maximum deduction of five hundred thousand.
If you do the math, if you're maximizing it at 20% that mean
income of two point five million with $500,000
deduction if. You're single.
It would be a $400,000 maximum deduction under the new proposals.
You may think those are large numbers, but it is going to hit
a significant amount of people if it passes in this way.
So this is just another way, in addition to the actual rate increases,
that we may see tax rates increase indirectly.
This last one is huge.
This is the excess business loss.
This was a new concept as part of the Trump administration also.
But its limits are going
to potentially get a lot harsher if it passes how it is.
So let's just do a quick example of how this works.
But essentially, if you have a W-2 wage, so let's say whatever profession you're
in, let's say you're a dental practice.
And let's say you take a wage
of $100,000 every year just to keep it simple,
and then let's say you're organized in the business as an S-corporation,
then you would if in any particular year
you had a loss, let's say it was $50,000.
Well, you used to be able to take this loss against your wages,
so you'd only be taxed on the difference,
you'd be taxed on fifty thousand, which is what you made, right?
Well, the change now this year is
that will go away.
You won't be able to take this excess business loss.
So because it's a loss, you would actually be taxed
on your wage income only.
And that's a big change.
So what would happen here, you might ask?
Well, that would carry forward to some future year
when maybe you generated some positive income for the business.
So if this actually comes to fruition,
there's a lot of planning that you could do around this.
You may want to look at before year end what your wage number is
so that you can get this number to be either positive or closer to zero,
if that's a situation that you're potentially looking at.
So keep all these in mind.
These are probably going to change slightly as they move through the process.
But it was great talking. And I'll look forward to seeing you in the.