New tax on capital gains to go into effect in 2013

As the Supreme Court recently upheld the Affordable Care Act, it’s important to understand the details of the Act’s new taxes as they effect real estate and real estate derived incomes.

Starting January 1, 2013, there will be an additional 3.8% tax on investment income and capital gains for those individuals who make more than $200,000 of Adjusted Gross Income (AGI) or $250,000 AGI on a joint return. The new tax applies to investment income, defined as interest, dividends, capital gains and net rents. These items are all included in an individual’s AGI. A formula will determine what portion, if any, of these types of investment income would be subject to the tax.

Here are some additional facts based on misinformation that has been disseminated through emails:

The tax is NOT a transfer tax on real estate sales and similar transactions. Not long after the tax was enacted, erroneous and misleading documents went viral on the Internet and created a great deal of misunderstanding and made the tax into something far more draconian than the actual provisions.

The new tax does NOT eliminate the benefits of the $250,000/$500,000 exclusion on the sale of a principal residence. Thus, ONLY that portion of a gain above those thresholds is included in AGI and could be subject to the tax.

REALTORS® should familiarize themselves with the tax, but should not advise their clients about the application of the tax. The amount of tax will vary from individual to individual because the elements that comprise AGI differ from taxpayer to taxpayer.

Find additional information here, or download a brochure with hypothetical scenarios of the tax in action, as it relates to real estate.