The 2013 3.8 % Tax: Will it affect you?

The 2013 3.8 % Tax: Will it affect you?

As 2013 quickly approaches, a new 3.8 percent tax on certain qualifying investment income will begin. The tax, which was passed by Congress in 2010, was created to assist in generating funds up to $210 billion to help fund President Obama’s health care and Medicare overhaul plans.

The following tips & scenarios are provided by the National Association of Realtors to help agents, buyers, sellers and the public alike to understand some of the quirks of this new tax. SETCO wants to make sure you are aware of these changes and how they may affect you and your clients.

  1. It is important to note that this tax will not be implemented on all real estate transactions. When legislation on this tax is effective in 2013, the tax may be implemented on income from interest, dividends, rent (less expenses) and capital gains (less capital losses).
  2. This tax applies to individuals with an adjusted gross income (AGI) above $200,000 and couples that file a joint return with more than $250,000 AGI.

Scenario One: Capital Gain: Sale of a Principal Residence

Type of Income: Interest, dividends, rent (less expenses), capital gains (less capital losses).

Formula: The new tax applies to the lesser of: investment income amount, excess of AGI of $200,000 or $250,000 amount.

In this scenario, if John and Mary had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI.

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

The tax applies as follows:

AGI before taxable gain: $325,000

Gain on Sale of Residence: $525,000

Taxable Gain: (Added to AGI) $25,000 ($525,000-$500,000)

New AGI $350,000 ($325,000+$25,000 taxable gain)

Excess of AGI over $250,000 $100,000 ($350,000-$250,000)

Lesser Amount (Taxable) $25,000 (Taxable gain)

Tax Due $950 ($25,000 × 0.038)

In this example, only $10,000 of their capital gain is subject to the 3.8% tax. If their gain had been similar (less than $110,000). They would not pay the 3.8% tax because their AGI would be less than $250,000.

Scenario Two: Capital Gain: Sale of a Non-Real Estate Asset

In this scenario, 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.

The tax applies as follows:

AGI Before Capital Gain $140,000

Gain on Sale of Stocks and Bonds $120,000

New AGI $260,000

Excess of AGI over $250,000 $10,000 ($260,000-$250,000)

Lesser Amount (Taxable) $10,000 (AGI excess)

Tax Due $380 ($10,000 × 0.038)

There are several more scenarios that apply to the following topics:

Rental Income: Income Sources Including Real Estate Investment Income

Capital Gains, Interest and Dividends: Securities

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

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

Sale of an Inherited Investment Property: (Residential or Commercial)

Purchase and Sale of Investment Property: (Residential or Commercial)

Please visit the National Association of Realtors website for more information regarding this tax

As always SETCO is here to help!

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