Are you tired of the “Three T’s (tenants, toilets and trash)? Do you feel we are close to the top of the market cycle and want to take advantage?
Remember the familiar adage, "It's not how much you make, but how much you keep?"
This rings truer than ever for real estate investors today. Not only have capital gain taxes increased significantly for high earners, but many investors, below the top tax bracket, face an additional 3.8% surtax on passive investment income like capital gains.
Fortunately, IRC Section 2013, a provision which has been in the tax code since 1921, provides critically needed tax relief.
TAX INCREASE #1 - 20 PERCENT CAPITAL GAIN TAX
As of January 1, 2013, the capital gain tax rate increased to twenty percent (20%).
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, imposed a new three point eight percent tax (3.8%) on certain investment income. The tax applies 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 is applied 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 and the Medicare Tax is a tax rate of 23.8% 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.
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.*
My firm, Real Estate Transition Solutions, addresses key issues related to selling and repositioning investment real estate in ways that can increase income, reduce risks and defer the tax liability associated with selling appreciated real estate. Have questions? Get in touch with us today to set up a meeting.
*Don’t forget there may be a hefty tax liability.
*Check with your accountant to know how much or call us to assist you in determining your tax liability.