A simple explanation of the new 3.8% tax

A new 3.8% percent tax will go into effect beginning January 1, 2013 on investment incomes in efforts to generate an approximate $210 billion for health care and Medicare plans. What’s important to note is that the tax does not apply to all real estate transactions–only those with the AGI listed below who have seen income from interest, dividends, rents and capital gains.

The new tax applies to:

  • Individuals with adjusted gross income (AGI) above $200,000
  • Couples filing a joint return with more than $250,000 AG


The National Association of Realtors has put together an informative brochure with the following scenarios as examples.

Capital Gain: Sale of a Principal Residence

John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain).

Capital Gain: Sale of a Non-Real Estate Asset

Barry and Michelle inherited stocks and bonds that they have decided to liquidate. The sale of these assets generates a capital gain of $120,000. Their AGI before the gain is $140,000.

Capital Gains, Interest and Dividends: Securities

Harry and Sally have substantial income from their securities investments. Their AGI before including that income is $190,000.

Rental Income: Income Sources Including Real Estate Investment Income

Hank has a “day job” from which he earns $85,000 a year. He owns several small apartment units and receives gross rents of $130,000. He also has expenses related to that income.

Rental Income: Rental Income as Sole Source of Earnings –
Real Estate Trade or Business

Henrietta’s sole livelihood is derived from owning and operating commercial buildings. Thus, these assets are treated as business property and not as investment property.

Sale of a Second Home with No Rental Use (or no more than 14 days rental)

The Bridgers own a vacation home that they purchased for $275,000. They have never rented it to others. They sell it for $335,000. In the year of sale they also have earned income from other sources of $225,000.

Sale of an Inherited Investment Property (Residential or Commercial)

In 2010, Ethan inherited a four-plex investment property from his great aunt. She had used it for many years as an investment rental property in San Francisco. At the time of her death, the adjusted basis of the property was $10,000. During her period of ownership, she had taken $240,000 of depreciation deductions on it. Its fair market value was $900,000 when she died. Because there was no estate tax for 2010 and because carryover basis was in eff ect, Ethan’s basis in the inherited property is also $10,000. The prior depreciation allowances carry over to him, as well. He continues to use the property as an investment rental property. Ethan later sells the property for $1.2 million. He is single and reports Schedule C self-employment income of $180,000.

Purchase and Sale of Investment Property (Residential or Commercial)

Ethan has purchased an investment property for $900,000. During his period of ownership, he takes $230,000 in depreciation deductions. He has also made some improvements to the property. At the time of sale, his adjusted basis in the property is $760,000. He subsequently sells the property for $1.2 million. In the year of sale, he is single and reports self-employment income of $315,000.

For more details on any of these scenarios, download the free brochure to review the income and tax data along with additional notes further explaing each.


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