Monthly Archives: April 2011

HAVE YOU HEARD ABOUT THE NEW REAL ESTATE TAX TO SUPPORT HEALTH CARE REFORM?

Lots of people are talking about the new 3.8% tax which will support Mr. Obama’s new health care plan. LOTS OF PEOPLE ARE CONFUSED ON THIS ISSUE SO HERE IS THE SCOOP-PLEASE SEE DISCLAIMER BELOW.

Beginning Jan 1, 2013, a new 3.8% tax will be levied on “unearned income” of “high income taxpayers”. These levies are being referred to as “medicare taxes”. Unearned income is any income you would earn from investing your capital. W2 and 1099 income for instance is not classified as unearned income. For example, if you purchase a real estate investment any income form that investment is considered unearned income. So, who is a “high income” tax payer? If your filing status is “single” and your AGI (adjusted gross income) is $200,000.00 of more, or if you are married and your filing status is “joint” and your AGI is $250,000.00 or more you are probably subject to the tax. The portion of your unearned income that will be subject to the tax is the amount of income you derive from the unearned sources reduced by the expenses associated with earning that income. That would be “net” investment income. So, if your gross rents from operating a real estate investment were $100,000.00 and associated expenses of operating that investment were $40,000.00 you would realize net rents of $60,000.00 and that would be the amount you would include in your AGI. Note that the tax does not apply to annual appreciation of an investment. The tax one might pay here is calculated using a formula ( the government seems to do everything by or based on a formula). The tax imposed will be determined by the LESSER OF 1) net investment income or 2) the excess of AGI over the $200,000.00/$250,000.00 AGI thresholds. Thus if net investment income is the smaller amount then the 3.8% is applied only to that number. If the excess over the threshold number is the smaller amount the 3.8% would be applied to that number. HERE IS THE QUESTION EVERYONE HAS BEEN WAITING FOR!!!! Will this tax apply to the any gain on the sale of my personal residence? Any gain on the sale of a personal residence will be protected from this tax the same as it is from income tax – that is, if your filing status is “single” and your gain is less than $250,000.00 or your filing status is “joint” and your gain is less than $500,000.00 you are protected from this tax. If you realize a gain more than those numbers then you would be subject to the tax as described in the formula above. There are other provisions in this new tax law that we will not discuss here- vacation homes etc. DISCLAIMER*********I am not an accountant but I feel this information is accurate. If you have any questions feel free to call me. HOWEVER, if you feel you may be subject to this tax I would suggest you call your accountant for advice.