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Impact of Impending Tax Increases on Investment Real Estate

Real Estate Agent with - Gianni Property Group - Cary, NC

House with Dollar SignAre You Debating About Whether on Not to Sell Your Investment Property due to impending Tax Increase?

There are 2 impending tax increases that are about to ensue that should prompt you to re-analyze your investment properties.  The first is the expiration of the Bush-Era tax cuts on Jan 1, 2011.  The second is the implementation of the Healtcare Reform Act's tax increases.  These tax increases will affect your After-Tax Income and the Capital Gains Tax that you pay upon the sale of your asset. 

After-Tax Income

The expiration of the Bush-Era tax cuts will reduce your After-Tax Income by an amount equal to tax increase.  In order to negate the effect of these taxes, you'll need increase your rents according to the following table in order to break-even:

        - The 10% bracket rises to 15%

- The 25% bracket rises to 28%
- The 28% bracket rises to 31%
- The 33% bracket rises to 36%
- The 35% bracket rises to 39.6%


Capital Gains Tax

If you sell your investment property in 2010, the capital gains tax rate is 15%.  However, this rate will not remain the status quo under the following probable tax increase scenarios:

Impact of the Expiration of the Bush Tax Cuts on December 31, 2010

If you sell in 2011 through the end of 2012, the capital gains rate will increase to:

20% for assets held less than 5 years

18% for assets held more than 5 years

In order to nullify the effects of this increase, you'll need to wait until your asset appreciates an additional:

6.25% for assets held less than 5 years

3.66% for assets held more than 5 years


Expiration of Bush Cuts and Enactment of Medicare Tax on January 1, 2013

If you sell in 2013 or beyond and earn $200k (individual) or $250k (couple) annually, you will pay an additional 3.8% Medicare Funding Surcharge Tax.  This tax increase is the result of the passage of the Healthcare Reform Act of 2010.  If this applied to you, your capital gains tax rate will rise to:

23.8% for assets held less than 5 years

21.8% for assets held more than 5 years.

In order to nullify the cumulative effects of these 2013 tax increases, your asset would need to appreciate an additional:

11.5% for assets held less than 5 years.

8.75% for assets held more than 5 years. 


The Caveat!  The Homeowner's Capital Gains Tax Credit

IRS Publication 523

Did you originally buy this asset to be your primary residence and then converted it to an investment property?   Want to pay 0% capital gains tax?  You may be able to exclude the gain realized on sale of a one-time principal residence from income if, during the 5-year period ending on the date of the sale, the follow conditions apply:

•·   You owned the home for a minimum of 2 years.

•·   You lived in the home as your main home for a total of at least 2 years or 24 months.  (The 2-year or 24-month period need not be continuous.)

•·    During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

Given the impact of these impending tax increases, it would behoove all investors to analyze the before-tax, after-tax, and tax-due-on-sale profitability of their real estate portfolio.  If you're unsure of how to perform these analyses, be sure to consult with an accountant or real estate agent with expertise in the sale and management of investment properties. 

Edward & Celia Maddox
The Celtic Connection Realty - Queen Creek, AZ

I hope the congress has the good sense nto to kill this tax cut, and a time of troubling ecomony

Aug 04, 2010 04:25 AM