New 3.8 Percent Tax and the Impact on Real Estate Investors
New 3.8 Percent Medicare Tax
With potential tax increases looming on the horizon, the value of tax deferral mechanisms, such as Section 1031 exchanges, have never been greater. One example of a potential tax increase which appears likely to take effect is the new Medicare tax, which Congress passed as part of the Health Care and Education Affordability Reconciliation Act of 2010, and was recently upheld by the Supreme Court. The Medicare tax, which goes into effect on January 1, 2013, will impose a 3.8% tax on the net investment income of joint filers with adjusted gross income over $250,000, and single filers with adjusted gross income over $200,000.
The new Medicare tax applies to adjusted gross income (the figure on the bottom of the front page of IRS Form 1040), which includes interest, dividends, capital gains, wages, retirement income and income from partnerships and small businesses. It appears the tax will also apply to dividends, rents, royalties, interest (except municipal bond interest), short and long-term capital gains, the taxable portion of annuity payments, income from the sale of a principal residence above the $250,000/$500,000 exclusion, gain from the sale of an investment property or a second home, and passive income from real estate and investments in which the taxpayer does not materially participate.
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The Pending December 31, 2012 Expiration of the Mortgage Forgiveness Debt Relief Act
By: Dr. Ted C. Jones, Stewart Title’s Chief Economist-Senior Vice President
The clock is ticking for individuals either facing foreclosure or that are underwater and desire to complete a short sale of their primary dwelling, in regards to any debt forgiveness. What may not be a taxable event in 2012, might become imputed ordinary income in 2013 (assuming Congress does not extend some previous legislation). If you are contemplating either completing a short sale or being foreclosed on, make certain to have these completed by year end or you will potentially owe ordinary income tax in 2013 on the same transaction. Time is quickly expiring.
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Intent to Hold for Investment – Reesink v. Commissioner
In a recent Tax Court case, Reesink v. Commissioner, (April 23, 2012) T.C. Memo 2012-118, husband and wife purchased a residential house as a replacement property with the intent to rent the property. Unfortunately, the Reesinks were unable to find a tenant and obtain the rent they wanted, so they decided to sell their current residence and move into the rental home that they acquired in the 1031 exchange. They moved into the rental home only 8 months after it purchased in the tax deferred exchange. Nevertheless, the Tax Court found that the Reesinks intended to hold the rental property as an investment at the time they engaged in the 1031 exchange.
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1031 Basics: How Long to Hold
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At Asset Preservation, Inc., we are often asked “How long do I need to hold my property to qualify for a 1031 exchange?” As explained in the full article, the question ‘how long to hold’ is not really the right question. Although many tax advisors will say that the property should be held for two years or more, that is only a partial answer and does not cover all cases. A shorter holding period will work in some cases given the right facts and circumstances. |
Private Letter Ruling 201216007
PLR 201216007 addressing related party and other issues was released by the IRS on January 9, 2012. This PLR reaffirmed many of the recent positions taken by the IRS and indicated that a small amount of taxable boot received by a taxpayer purchasing a replacement property from a related person who is also exchanging will not disqualify the exchange. In this PLR, the IRS noted that the amount of taxable boot was less than 5% of the taxpayer’s gain.
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