Now that the administration’s healthcare bill has passed, things are kicking into gear. The Republicans are amping up their campaigns on reversal and repeal; the Democrats are working on setting the thing in stone, and homesellers are getting ready to “do their part,” (like it or not) by making a little less money on the sale of their properties.
While there are a number of things that a number of people take issue with in this bill, for now, we’re going to focus on real estate. It’s not a secret that I think this bill was a terrible idea, but for now, whether you loved it or hated it, you need to be aware of the direct impact that it is going to have on you as a real estate investor.
Obamacare places a 3.8 percent annual tax on investment income on individuals who make 200,000 dollars or more a year, and on couples that make 250,000 dollars or more a year. How does this impact you and your clients? That income includes the money you make on property when you sell it, even if it is your primary place of residence if it exceeds capital gains thresholds. This could have a particularly detrimental effect on real estate investors, who tend to deal in large sums, but may not do a lot of deals per year.
Please note: these thresholds have been reported at varying levels from 200,000 per individual to 250,000 per individual. Most government representatives are spending most of their time emphasizing that the taxes are aimed at “high earners” rather than “regular people” and are not spending a lot of time making declarative statements about what actually constitutes a “high earner.” We do not have firm numbers since so much contradictory information – even from government agencies – is currently out there as people on both sides sift through the bill to find out what is actually in it.
Thank you for reading the Bryan Ellis Real Estate Letter – your thoughts and comments are welcomed below!
A question. When does the new 3.8% tax on incomes over $200,000 per year go into effect?
Right now … or is it next year or later?
And would this 3.8% tax also go on capital gains increase (even from prior properties that was transferred via 1031 exchanges) that is now being sold? I am selling a property that was previously in a series of 1031 exchanges.
(I am asking due to a transaction (sale of property) that I am involved with right now that will “close” in July, 2010.
Please let me know. And thank you!
Ron
If one wants to understand what a “high earner” is, just look at AMT. Only a very few people were effected at first and since then almost 4 million people are under the AMT and there is no end in sight on this tax nightmare.
Within a few years it will be down to $75,000, most likely less and you can be certain the rate will go up. Should work well in conjunction with the upcoming bail out of Fannie and Freddie and the soon to be coming second dip of the economy and accelerating number of foreclosures we are going to see over the next two years.
Does this new healthcare cover the raging headache I have from all of this theft?
Real estate investors are about to be hit with a one, two double whammy of new capital gain tax increases. Read below to see the coming tax hikes:
CAPITAL GAIN TAXES GOING UP, WAY UP
“58 PERCENT INCREASE IN CAPITAL GAIN TAXES IS COMING”
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
Since 1921, 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 a reputable qualified intermediary such as Asset Preservation (www.apiexchange.com) to learn more!
One thing you should always point out to people when you talk about tax increases is that raising taxes DECREASES tax revenues, while lowering them INCREASES tax revenues. This has been demonstrated consistently in other countries, and in some U.S. States. Taxing constitutes eating our seed wheat. Lowering taxes results in more seeds being planted. There is a huge opportunity cost we have to pay when the politicians pile more taxes on us. It doesn’t matter if the “high earners” are the ones being taxed. The effect is the same. I know this isn’t your focus, here, but I think it’s important, whenever we talk about taxes, that we point this out. Eventually, maybe a critical mass of people will get the word! Thank you for your considerationof my comments.
Hey Bryan,
Well I’m not going to attempt to defend the Health Care Bill because I’m too far removed to make a clear decision one way or another. How I would appreciate it if in the future when you’re going to make such matter of fact statements that you include your sources from which you got your information.
In my opinion, it does none of us much good to make statements of this nature without something to back it up. However, as an Investor 2 or 3% given back to help our great Nation to assist the less fortunate doesn’t bother me.
I feel blessed that I have the knowledge to be one of a few people that understands how to get around in the Capitalistic society and profit from Real Estate Investing.
Taxes are a part life here in America. Its how we get things done. There are many laws that prevent you from evading your share of taxes. However, there is no law that says you can’t avoid them. In fact there are many that actually help you avoid them if you know what you’re doing and where to look or where to get help. Any RE Investor worth his/her salt should be aware of this and should have already taken whatever steps are necessary to decrease his/her tax burden.
You should spend you’re time being more positive about the situation instead spewing the negative. Why not spend some time an knowledge explaining how to avoid the taxes, without regard to which government bill sponsored it. Its all the same.
@Bigc – I must admit, I’m a bit confused by your inane and convoluted reply to Bryan’s post. What “matter of fact statements” were made that require “sources” for the information? The Health Care Reform Bill IS the source. The Medicare payroll tax that you now pay on your earned income is going to be expanded to include a 3.8% tax on your portfolio income (which includes capital gains). Just like the Alternative Minimum Tax, which Congress has to adjust each year to protect millions of households, this new tax is not indexed for inflation, so as incomes rise over time, more taxpayers will incur the tax. Regardless of how small, there WILL be an effect on the income from your real estate investing activities and I, for one, appreciates that Bryan takes the time amd effort to keep us updated.
To the above blogger. If you still pay taxes then your are not removed from the devastating bill that just pasted and the tax hike that you are mandated to pay now just because of your income that you or I make. I contribute weekly to non profit organizations and I reach out to my community on a monthly basis. But I do it out of my choosing not because the governement which has proven time and time again that they don’t mind spending more than they make made me. I like the freedom to help. We are going to pay for a program for four years before any benefit is realized try that with your car insurance. And the last is almost 70% of Americans did not want it but they had to do back room deals and strategies that were never before used before to pass a bill.