This is the last Tax Attic article for 2018. As I stated last week, December 31, for the most part, brings an end to tax planning for the current year. I say “for the most part” because there are a few ways to still take advantage of tax savings all the way to the tax filing deadline, usually April 15. Those strategies are a great topic for the first 2019 tax article. However, before starting with that topic, I want to highlight a couple of little known strategies that will become more popular since the passage of the Tax Cuts & Job Act (TCJA).
One strategy has become more important since the TCJA increased the standard deduction so fewer taxpayers could itemize involves taxpayers who own unimproved real estate. These taxpayers have the option to make an election to capitalize into the cost of the property, and not deduct, the cost of real estate taxes, mortgage interest and service fees. Prior to the TCJA, the real estate taxes and mortgage interest were most likely deducted on the Schedule A so tax savings were realized immediately. Now, taxpayers may not qualify to itemize so there would be no immediate tax savings. In that case, tax professionals, like me, explore the Internal Revenue Code and any rulings that may give our clients at least some long term tax savings. There is a little known or used provision that allows taxpayers to capitalize the property tax, mortgage interest and fees that will increase the cost basis of the unimproved real estate. If the property is sold, the higher the cost basis, the lower will be the profit. For example, our taxpayer buys 20 acres of hunting property in Stanton for $40,000. In the next 10 years, the property taxes and mortgage interest added up to $15,000. In the 11th year, the property was sold for $60,000. Without capitalizing the property tax and mortgage interest, the taxpayer had a gain of $20,000. By capitalizing the $15,000, the gain is reduced to only $5,000. Potential tax savings on $15,000 between federal tax and Michigan tax could be as high as 24.25% or $3,632. The only caveat is the taxpayers have to annually make the election to capitalize the property tax, interest and fees. There is a statement that can be attached to the return stating the intent to capitalize the expenses and not currently deduct them. For taxpayers with unimproved real estate, this is a strategy to consider.
The second strategy involves taxpayers who own improved real estate such as rental real estate property or nonresidential commercial real property. The TCJA greatly expanded the kind of property that could be written off using Section 179. Section 179 allows qualifying property to be entirely written off in the year when it is placed into service. The TCJA expanded the definition of “qualifying property” to include items that previously could only be written off for 10, 15, 20 years or more. For example, roofs, security systems, heating, ventilation, and air-conditioning (HVAC) property, and fire protection and alarm systems now qualify to be expensed if the items are installed in nonresidential commercial property. For residential rental property, furniture and appliances can now be written off. The annual deduction is now limited to a maximum of $1,000,000. In my years in the tax business I haven’t encountered that big of a deduction but I have seen plenty of HVAC and roof purchases for $10-20,000 and sofas and stoves for $500 that will now be able to be written off in the year of purchase. Immediate tax savings can come in very handy in the right circumstance. Before I sign off, best wishes to each of you as we close out the 2018 year and enter the New Year of 2019. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
Contact Jerry at www.actiontaxservice.com.