This post is prompted by my mom… since she is worried, here is my overview :0)…
Beginning January 1, 2013, a new 3.8 percent tax on some investment income will take eﬀect. This new tax was passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Obama’s health care and Medicare overhaul plans. This tax WILL NOT be imposed if you buy a home in Hilton Head, SC or on any real estate transactions, a common misconception.
Rather, when the legislation goes into effect in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples ﬁling a joint return with more than $250,000 AGI. The new tax applies to the LESSER of Investment income amount or Excess of AGI over the $200,000 or $250,000 amount.
What this means when selling your primary residence:
With the Taxpayer Relief Act of 1997 came the ability sell your primary residence and make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes. To do this, the property you are selling must be your principal residence. You also must live in that principal residence for two of the five years before you sell it.
So, under the new 2013 tax, none of the gain on the sale of your home is subject to the 3.8% tax unless (assuming you are married) you earn over $500,000 in profit from the sale and you have an AGI of over $250,000.
What this means for real estate investors:
This gets a little more tricky and every investor will need to look at their personal and real estate income each year. In an example of a landlord, you would take your gross rent minus expenses and add this net income to your income from other sources. If that amount is over the AGI limits of $200,000 (individual) or $250,000 (married), then you take the lesser of the amount over AGI or the Investment income amount and the 3.8% tax applies to this amount.
**Note… This is my understanding on the new tax, reading from multiple (bi-partisan) sources… I am not into politics, nor am I an accountant… remember to always consult your tax advisor for advice on such matters.
There you go mom…