As you will recall, a few months ago we blogged about the 3.8% Medicare Tax included in the Affordable Care Act (“AFA”) passed by Congress. As we told you at that time, this is not a real estate tax, but instead is a tax on the unearned (for example, capital gains) income of certain high income taxpayers. Since this tax will take effect on January 1, 2013 (unless political developments result in the AFA’s repeal), it is now an issue that you should discuss with appropriate sellers. As you know, we are not accountants or tax attorneys and should not give tax advice. However, as real estate licensees we should remind high income sellers that the law will take effect next year and its Medicare tax may make it desirable for them to close a sale prior to the end of 2012. Again, don’t try to explain the details of the law to your clients. Rather, tell them in general terms what it is about and that it will be effective on January 1, and recommend that they talk to their attorney or accountant about its potential impact on them. Of course, if our clients might be impacted by the new law, it could help increase our business in the next two and one-half months. So warn your clients and refer them to an expert. That way, if they sell in 2013 and have an increased tax bill, they will not be able to blame you.
For ease of reference, and to remind you of the law’s basic provisions, below is the information we provided in our earlier post. As always, feel free to contact us with any questions you may have.
1. A “high income” taxpayer is one whose tax filing status is single and who has an adjusted gross income of $200,000 or who files a joint return and has an adjusted gross income of $250,000.
2. “Unearned” income is income that derives from investing a person’s capital, including capital gains, rents, dividends and interest.
With those definitions in mind, NAR explains that the tax is imposed on the lesser of (1) the person’s net investment income; or (2) the excess of their adjusted gross income above the $200,000/$250,000 thresholds. For example, if my filing status is single and my adjusted gross income is $290,000, while my net investment income is $75,000, then the 3.8% is imposed on the $75,000, since that amount is less than the $90,000 excess above the $200,000 threshold. In our case, if part of the investment income is from the sale of real property, than it would contribute to the amount being taxed. But, it is an investment income tax rather than one specifically on real estate.
As always, let us know if you have any questions
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