While nothing is certain yet about tax reform, it appears likely that Congress will pass, and the President will sign, some version of H.R. 1, the Tax Cut and Jobs Act, this year.
Both the version passed by the House, and the version passed by the Senate, either eliminate or substantially limit your ability to deduct state and local taxes (“SALT”). Both versions currently have provisions limiting SALT deductions to $10,000 of property taxes on your residence.
We believe it is likely that the property taxes on your rental property will still be deductible next year as a business expense, but some prominent CPAs are not certain. If you want to be sure you get as much tax benefit as possible, you may want to pay the second installment of your property taxes on rental property before December 31, 2017. And, if you have the cash flow, you should probably pay the second installment on your non-rental property this year as well if the SALT deduction is removed or you anticipate more than $10,000 in property taxes on your residence next year.
Of course, given the lack of certainty, you may want to wait and see what form the SALT limitation takes in the final bill, assuming one will pass this year. However, you should plan your liquidity so that you will be able to make the payment before year-end even if Congress does not act until just before the new year.
It would be a real shame if you do not make the payment this year and then the tax reform bill (and IRS rules) denies the deduction for amounts paid next year. For the same reasons, you should make sure you fully pay your estimated state income taxes this year, as it seems likely that they will not be deductible for Federal income tax purposes next year.
I plan to prepare an analysis of the impact of the new tax bill on apartment owners after it is passed. But, such article will likely not be published until the February or March issue of the AOA News, depending on when the final bill comes out and how quickly we can finish a preliminary analysis, since the printer’s deadline is usually prior to the start of the month before the issue date.
Just a short preview: I think the tax reform bill will give substantial estate tax relief, but preserve the step-up in basis. This is consistent with the planning philosophy I urge in my seminars for most owners, for whom estate taxes are either less important than income tax and property tax planning, or are totally irrelevant. The anticipated expansion of estate tax deductions will probably protect 99.5% or more of families from any Federal estate exposure.
Unfortunately, however, the California State Senate has a bill pending to impose a California Estate Tax which would be just as bad as the current Federal Estate Tax. That would probably require an amendment to the State constitution, which means it will need to be approved by the voters. Stand by, and prepare for a big fight on that one!
Mr. Ziskin presents regular seminars for AOA members on Estate Planning for Apartment Owners and offers free consultations for AOA members. He can be reached at (818) 988-0949, or by e-mail at firstname.lastname@example.org. He will cover planning implications of the new tax act in his 2018 seminars (assuming one gets signed into law) and expects to provide a more complete article in the February or March issue of the AOA Magazine.