Part I of this column discussed changes affecting real estate including the pass-through business deduction adopted in new §199A of the Tax Cuts and Jobs Act (Tax Act), Pub. L. No. 115-97 (enacted Dec. 22, 2017). This column expands upon the workings of the pass-through business deduction (pass-through deduction).

Subject to limitations discussed below, the Tax Act provides for a maximum effective tax rate of 29.6 percent on an individual’s domestic qualified business income (QBI) from a partnership, S corporation, or sole proprietorship. The reduced maximum rate arises from a 20 percent deduction ([100 percent – 20 percent] x 37 percent top individual marginal rate = 29.6 percent). Thus, a high-income taxpayer with $100,000 of qualifying income would get a deduction of $20,000. The remaining $80,000 of income (after the deduction) would be taxed at 37 percent. The taxpayer would owe $29,600. The taxpayer’s effective tax rate is 29.6 percent. Any qualified business losses carry forward to the next tax year and reduce the amount of QBI included in determining the amount of the pass-through deduction for that year. Real estate rental income will qualify for the 29.6 percent rate; long-term capital gain income will continue to be taxable at 20 percent, and short-term capital gain will now be taxable at the maximum 37 percent individual rate. The pass-through deduction for QBI is effective for taxable years beginning after Dec. 31, 2017 and sunsets after Dec. 31, 2025.