Rental Real Estate Problems Loom with New Medicare Tax coming in 2013
When Obama signed the Health Care Act on March 23rd 2010 we knew there would be changes on the horizon, but did you know it would hold major changes for Residential Rental Income property holders? The Patient Protection and Affordable Care Act will affect those who hold rental income properties and vacation homes starting in Jan 2013. “Unearned income” will be subject to a new 3.8% tax. Examples of unearned income include bond interest, dividends from stocks; royalties; capital gains from selling investments at a profit; and income from rental property; and other sources.
On June 28th in a 5 to 4 decision, the Supreme Court ruled that most of the Patient Protection and Affordable Care Act of 2010 was constitutional. The ruling means that the tax changes included in the law where also constitutional.
Some believe selling before 2013 arrives will be the best choice instead of being taxed the new 3.8%
This new 3.8% tax will be imposed on unearned income for single taxpayers with income over $200,000 and married couples with income over $250,000 filing jointly
The Medicare tax on earned income will be a 0.9% tax that will apply to wages and self employment income in excess of $200,000 for singles and $250,000 for married couples filing jointly.
Selling your principal resident does not have the same effect as selling your Rental property and vacation homes.
The$250,000/$500,00 home sale exclusion doesn’t apply to your principal residence. So gains from other sales may be hit with the extra tax if you have a high income. If you sell your property before 2013, (as far as the Medicare tax goes) you are in the clear.
Capital Gains Tax will possibly see increases beginning in 2013
Bush tax cuts are scheduled to expire, increasing the maximum tax rate to 21.2%comapred to current 15% long-term capital gains tax. Short-term capital gains tax will hit a whopping 40.8% compared with the current tax of 35% maximum rate. As new the health care law imposes its 3.8% tax on the investment income (including capital gains) of high-income taxpayers, some will see the opportunity for selling in 2012 better than facing a tax burdened year in 2013.
Rental owners who have built substantial equity may see strong incentives to sell in 2012 before the new changes take effect.
There are a few exceptions to this strategy:
- If you give long term capital property to charity you will avoid the capital gains tax.
- If you hold appreciated stock until death you will avoid capital gains tax entirely.
There are many different scenarios; your decision should be based on your specific situation. Higher unearned income taxes combined with higher expected capital gains taxes makes 2012, some would say, a good time to sell rental properties than recent years in the past.
Do what is best for your situation, Consult your tax professional.