No matter who you are or what tax bracket you’re in, one thing remains true. That means you want to take advantage of as many legally permitted tax breaks as possible. If you don’t act quickly, you may lose the opportunity to receive his 20% cut of investment income. Keep reading to learn how you can continue to take advantage of this tax cut and potentially help it get extended in Congress.
Senator, Tax Cuts and Jobs Act, Real Estate Investment
One of the most controversial provisions of the 2016 Tax Cuts and Jobs Act is known as the Coker Amendment. It was named after then-Tennessee Senator Bob Corker, who was unsure about voting for the bill. The bill’s authors sweetened the deal by creating a provision that would allow partners and members of limited liability corporations (LLCs) to receive a 20% tax break on pass-through income.
This provision was particularly attractive to Coker. He invests heavily in rental income real estate, and many of the assets in his portfolio were established as separate LLCs. The same is true for many real estate portfolios, and shareholders liked the Corker amendment just as much as the senators did.
This tax break is scheduled to expire at the end of 2024. That means you only have a few weeks left this year to become a shareholder in a real estate LLC and take advantage of these tax savings all next year. Forming an LLC is a legal process and can take several months, but there is still a way for him to become an LLC shareholder by the end of the year.
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Real estate investment trusts and crowdfunding platforms
Corker’s strategy is generally to hold real estate assets in separate LLCs or become partners in various LLCs. Many real estate investment trusts (REITs) hold their portfolio assets in the same way to prevent liability related to issues with one asset from being spread across the portfolio. The same applies to many of the investment products on real estate crowdfunding platforms.
For such products, your investment makes you a member or shareholder of the LLC that owns the property. This means you are entitled to receive monthly rental income and a pro-rata share of any appreciation in value when the property is sold. It also means you are eligible for a 20% tax break on pass-through income from your LLC.
Best of all, the income is passive. You become a shareholder/partner entitled to a pro rata share of the profits, but are not required to contribute to the day-to-day management of the assets. In most cases, you will be the general partner, and the LLC’s managing partner will be responsible for administrative duties such as collecting rent, accounting, and paying shareholders.
Where to find REIT and Real Estate LLC investment products
Publicly traded REITs can be found on the New York Stock Exchange, and real estate crowdfunding opportunities are available on platforms like CrowdStreet, Streitwise, Arrived, and Here. You will find a variety of products in a wide range of areas such as:
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Residential rentals (both traditional long-term rentals and vacation/short stay rentals)
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Commercial facilities (offices, shopping centers)
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Medical care (hospitals, outpatient facilities, medical office parks)
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industrial
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data center
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storage
What happens if you lose money on your investment?
There is a possibility of losing the principal invested in any product, and real estate is no exception. Although real estate has a strong long-term track record, there’s still a chance that the investments you choose will underperform your expectations or won’t make a profit at all next year. Your sensitivity to this risk may influence your decision in which investment products to participate.
While you can liquidate public REIT shares whenever you want, some crowdfunded investments and private REITs may have a lock-in period during which you cannot liquidate your shares. That’s why it’s important to understand the details of your chosen investment before committing to capital.
Can the 20% tax reduction be renewed?
If your investment makes a profit next year, you’ll get a 20% tax break on it. If you want to enjoy this tax reduction beyond 2024, contact your member of Congress and let them know how you feel. The real estate lobby will also be vocal. Remember, squeaky wheels attract grease.
Next year is an election year, and many lawmakers will be willing to demonstrate their commitment to lower taxes by extending this provision. In the meantime, take a look at the services available and see if one of them is right for your investment needs. Do your best to make a profit and save big on taxes.
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This article suggests that 2024 could be the last year to take advantage of this huge tax break on pass-through income from real estate LLCs.
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