Will ObamaCare destroy real estate investors?
Beginning January 1, 2013, a 3.8% Medicare tax will be levied on unearned income on ObamaCare’s definition of the wealthy ($200,000+ single filers & $250,000 for joint filers). This tax could apply to the proceeds from the sale of single family homes, townhouses, co-ops, condominiums, and even rental income. For many successful real estate investors, ObamaCare may have a significant effect on their bottom line.
The National Association of Realtors created an excellent Q&A page on how this legislation may affect real estate investors:
Here are a few highlights from that article:
Q: What is “unearned” net investment income?
A: Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)
Q: So the new tax will apply to rents from investment properties that I own?
A: Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation, cost of repairs, property taxes and interest expense associated with debt service. AGI includes net income from rent, so if your AGI is above the $200,000/$250,000 thresholds, then the rental income might be subject to the tax. For many investment real estate owners, the net rents will be the same as or similar to the amounts reported on their Schedule E, filed with their Form 1040 Income Tax Return.
Q: Does the tax apply to the yearly appreciation of an asset?
A: No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax purposes. This rule applies to real estate and all other appreciating capital assets. Net capital gains are taxable only in the year of sale.
So there you have it, that’s how ObamaCare may destroy real estate investors.