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What’s All This About a New Real Estate Tax?

Apparently, there was a little known tax added at the last minute to the Obama Health Care Reform Bill.  Many questions have been tossed around and it became clear that not many people were aware of this new tax that would obviously affect the real estate industry.  Well, thanks to our friends at the Georgia Association of REALTORS (GAR) and through them, the National Association of REALTORS (NAR), I was given this FAQ about this new tax.

Essentially, it is referred to as a Medicare tax and it will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws.  By this, I mean… Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly).  Any amount realized OVER that amount is taxable under current tax schedules based on income.  As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly).

For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.  More incentive to use a 1031 Tax-deferred exchange, yes?

Check out this link for the complete FAQ provided by NAR to learn more about this tax, how it may impact you, who it affects, and when it goes into effect.

Q&A 10 – Medicare Tax on Net Investment Income – 3-25-2010

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arrow4 Responses

  1. 54 mos, 4 wks ago

    The long term gains tax is effectively 18.8% (15% + 3.8% Health Care tax) for investment property held for one year or more. Wait to see whether the Bush tax cuts are renewed or will expire January 1, 2011 moving the long term capital gains tax higher to 23.8% and or higher given phased in income requirements.

  2. 54 mos, 3 wks ago

    Here is a more detailed analysis of the two capital gain taxes increases:

    TAX INCREASE #1 – 20 PERCENT CAPITAL GAIN TAX IN 2011
    On January 1, 2011, the capital gain tax reduction that was signed into law by President Bush under the Tax Increase Prevention and Reconciliation Act will “sunset.” The tax rate will revert from the current 15 percent rate back to the former 20 percent capital gain tax rate that was in effect prior to 2003.

    TAX INCREASE #2 – 3.8 PERCENT MEDICARE TAX IN 2013
    Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income. Also of relevance for rental property owners, this new tax applies to a real estate investor’s rental income if they have income above the $200,000/$250,000 income thresholds.

    The net effect of both capital gain tax increases is a new 23.8 percent tax rate for higher earners—the highest rate for long-term capital gains since 1997. The Joint Committee on Taxation estimates the new Medicare tax on investments will cost taxpayers over $30 billion annually. Additionally, the modified adjusted gross income threshold at which this Medicare tax will apply will not be indexed for inflation, which means an increasing number of taxpayers will be snared by this tax provision.

    Overall, the economic impact of these tax increases will be felt by the very investors who help promote long-term economic growth. In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends and an amazing 84 percent of all capital gains.

    THE COMING TAX INCREASES – A COMPARISON

    Current January 2013
    Conventional Short-Term 35.0% 43.4%
    Conventional Long-Term 15.0% 23.8%
    AMT Short-Term 28.0% 31.8%
    AMT Long-Term 15.0% 23.8%

    A SOLUTION AND WAY TO DEFER TAXES – 1031 EXCHANGES
    1031 tax deferred exchanges have been a proven tax saving strategy that helps real estate investors improve their investment position through the ability to not recognize Federal or state capital gain taxes. Contact the 1031 experts at Asset Preservation 800-282-1031 to learn more.

  3. Midi
    54 mos, 3 wks ago

    Wow, I love that some experts are chiming in… though I’m not sure about this shameless plug at the end of this last post… but more power to you!

  4. 32 mos, 1 wk ago

    Yesterday evening on Congressman Tom McClintock’s Townhall meeting on the phone, one caller asked him about the 3.8% sales tax when you sell a home. His response was he wasn’t aware of a sales tax on your home. There you go. With 2700 plus pages of this unadulterated BS, even our own representatives don’t know what’s in this bill. That is why it needs scrapping. Raising the SS age is unnecessary. They all need a lesson on spending only what they bring in in revenue. If they can’t do this than they need to all be voted out. We the citizenry have to balance our budgets.

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