The Affordable Care Act was passed on March 23, 2010 and has become known as ObamaCare. Buried deep in the Act are various tax increases designed to pay for additional governmental expenses that will supplement health care for millions of Americans.
The new taxes we want to address here became law on January 1, 2013 and affect real estate owners upon the sale of investment properties. The new laws tax capital gains from the sale of stocks, bonds or real estate and will assist in the funding of Medicare and other governmental services. Up to this point, Social Security taxes, Unemployment taxes and Medicare taxes were funded from employment income, not investment income.
This is the first time Capital Gains income from the sale of investments has been successfully targeted. The new Medicare tax rate is 3.8% and is now imposed on capital gains income.
It is our opinion that Americans are taxed more than enough and any additional attempts to take more money by way of taxation simply is another bad thing to happen to the borrowers we are in business to serve.
Now let’s take a look at the new tax laws as they apply to owners of investment real estate.
The new Medicare tax is as follows:
Capital Gains will now be subject to an additional 3.8% Medicare tax rate.
There are some income provisions that will allow many investors to avoid the new tax.
The minimum annual income levels that trigger the new taxes are:
- $200,000.00 AGI (adjusted gross income) per year for Individual tax filers
- $250,000.00 AGI (adjusted gross income) per year for joint tax filers
The other law change is an increase in the base Capital Gains tax rate, which is now effective as follows:
Capital Gains tax rate is increased from 15% to 20%.
The current federal income tax on capital gains is 15%. The new law provides an additional increase in the Capital Gains tax rate up to 20%.
There are two income limits that will protect many taxpayers from the new tax.
- $400,000.00 AGI per year for individuals tax filers
- $450,000.00 AGI per year for joint tax filers
The new 20% Capital Gains tax applies to taxpayers with AGI’s (adjusted gross income) over the respective minimum income limit which would trigger an additional 5% tax on their income.
Capital Gains taxes also apply to the sale of one’s personal residence if the profit from the sale exceeds the current taxable exemption of:
- $250,000 for individuals
- $500,000.00 for couples
Since there are numerous exceptions and tax implications, we highly suggest that competent income tax consultation be sought to determine any tax liability from the sale of real estate.
There is currently no governmental determination as to the possibility of “deferring” the 3.8% Medicare tax by using the 1031 tax free exchange.
We will report if and when the Internal Revenue Service issues an opinion as to the availability of deferring the new taxes in a 1031 tax free exchange.
In our next Blog we will take a look at new California tax laws that are now are in effect for 2013. We will give you a hint, they’re going up.