WHAT TAX ADJUSTMENTS IMPACT REAL ESTATE INVESTMENTS------------------
American Taxpayer Relief Act of 2012: A top capital gain tax rate that has seen a permanent 5% increase (from 15% to 20%) for single filers with incomes above $400,000 and married couples with incomes exceeding $450,000.
IRC Section 1411: A Medicare surtax on net investment income (including capital gains) resulting in a flat 3.8% increase.
RESULT: Higher-income taxpayers receive an increase of 58% as compared to 2012.
The fiscal landscape of the United States has changed in more ways than the everyday citizen can keep up with. High earning real estate investors face an increase in capital gain taxes and even for those who fall outside of the category of ‘high earner,’ still face a 3.8% surtax on passive investment income like capital gains.
WHAT CAN BE DONE---------------------------------------------------------------------
One possible tax provision may provide some tax relief.
IRC Section 1031: A tool to determine your personal capital gain taxation. Section 1031 enables property owners holding property for investment purposes to defer taxes that would otherwise be recognized upon the sale of investment property. Below are four ways investors may be taxed during the sale of investment property. (source: http://apiexchange.com/index_main.php?id=8&idz=236)
- Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.
- Federal Capital Gain Taxes: Investors owe Federal capital gain taxes on the remaining economic gain depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.
- New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on “net investment income.” This 3.8% Medicare surtax applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of “unearned income”).
- State Taxes: Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed. Some states have no state taxes at all, while other states, like California, have a 13.3% top tax rate.