The Real Deal New York

Big win for brokers: IRS says certain real estate pros can qualify for tax deduction

New tax law wasn't clear on definition of brokerage services
By Kathryn Brenzel | September 12, 2018 05:00PM

(Credit: iStock)

After some initial confusion, the federal government has indicated that certain real estate brokers can qualify for a hefty tax deduction.

The Internal Revenue Service recently published proposed rules that clear up whether or not brokers are eligible for the 20 percent pass-through deduction included in the new federal tax law. The law, signed into law in December, barred those who provide “brokerage services” from receiving the tax cut, but the definition of “brokerage” was left vague.

Now, the IRS’s proposed rules specifically state that the services provided by “real estate agents and brokers, or insurance agents and brokers” are not excluded. A hearing on the proposal is scheduled for Oct. 16.

Michael Slattery, senior vice president for research at the Real Estate Board of New York, said the proposed rules provide much-needed clarity. Still, in a memo to its members highlighting the change, REBNY notes that the rules around the deduction are complicated and brokers should still consult tax advisers.

The deduction, for instance, comes with various wage restrictions. Brokers who make less than $157,500 a year (or $315,000 if filing as a married couple) automatically qualify for the 20 percent deduction. For those making above those limits, the formula is based largely on Q-2 wages. Since many real estate brokers file their taxes as independent contractors through a 1099 form rather than a W-2, they likely won’t receive the full deduction. Still, Slattery said, the deduction is expected to make an impact.

“There are a lot of brokers out there that are not selling the $50 million apartments,” he said.

Michael Greenwald, partner and leader of the corporate and business tax practice at Friedman LLP, noted that the federal government still hasn’t made clear how certain landlords — like those who collect rent under triple net leases — fare under the new law. Whether or not such landlords are eligible for the 20 percent deduction depends if they meet the definition of an active “trade or business,” which remains to be seen, Greenwald said.

“Real estate brokers clearly got a good deal,” he said. “We’re still not sure if real estate owners will qualify.”