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How Does the 20% Deduction Apply to Rental Income/Exchanges?

It is important to stay up to date on the latest tax code implications as the IRS rolls out the concluding rules for the 20% business income deduction.

Good news for:

1. Owners of a partnership

2. Sole proprietors

3. Agents and brokers

4. S-Corps

5. LLCs

One of the biggest questions answered: This even applies if single filers' income exceeds $157,500/$315,000 for joint filers.

1031 Exchanges

Before the new rules were confirmed if an investor's income exceeded the perimeters mentioned above, and exchanged one property for a similar one to defer taxes, the deduction might have been reduced because of the exchange. After the new rules were confirmed, the IRS allows investors to use the unadjusted basis of the depreciable portion of the property to claim at least a partial deduction.

Rental Income

Rental property income can also be eligible for the new deduction, IF you can prove that your rental operation is part of a trade or business. Guidelines have been released by the IRS, including a, "bright-line test, or safe harbor," for proving rental income rises to the level of a trade or business. The safe harbor rule states you can claim a deduction if an investor's rental activities total at least 250 hours a year. Rental activities include: "...maintaining, repairing property, collecting rent, paying expenses, and conducting other typical landlord duties..." "If your activity totals less than that, you can still try to take the deduction, but you'll have to be prepared to show the IRS that your activity is part of a trade or business."

source: "IRS Provides Clear Test on How 20% Deduction Applies to Rental Income, Exchanges" National Association of Realtors

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