Taxmaggedon and the Real Estate Investor

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taxmaggedon-and-the-real-estate-investorThe Washington Post first coined the phrase “Taxmaggedon” to refer to all the tax changes coming our way January 1, 2013.

Real estate investors are especially going to hit hard.

There are 3 major changes coming in 2013.

First, the capital gains rate is going to increase. This will move from 15% to 20%. However, there is also a surtax if you income kicks over $200K for single and $250K for married. That surtax is 3.8%. So if you have a big sale of a property in a year, you could be looking at 23.8% in tax on that income in 2013, as opposed to just 15% in 2012.

One of the unknowns right now is how the surtax is impacted if you do a Section 1031 like-kind exchange. That’s the tax-deferred exchange you can do to roll from one property to another. I call it 4 green houses for 1 red hotel, just like in Monopoly. You didn’t pay tax in Monopoly, you don’t pay tax right now in a Section 1031 exchange.

You can defer the capital gains until a later date, but we’re not sure right now whether you can also defer the surtax. In other words, you may do a like-kind 1031 exchange and still pay tax.

So let’s say you have property and don’t sell. Instead you’re holding it for long term as a rental. If you’re like a lot of our clients, you may have a lot of real estate and if you and/or your spouse is also a legitimate real estate professional, you may also have a lot of tax deductions.

Alternative Minimum Tax (AMT) will be a problem for you. Starting in January 2013, the threshold amount is just $45,000 per year. That means if you make $45,000 per year after you’ve added back the so-called tax preference items, then you will have to at least calculate AMT.

The tax preference item is something that is either tax deductible like tax exempt interest from bonds or a deduction like accelerated depreciation on your regular tax return, but it is not tax free or a tax deduction on your AMT calculation. An AMT calculation is actually a separate calculation, with a different definition of income and deductions.

Basically, you have to learn a whole new way to calculate tax. First you calculate taxable income based on regular tax and apply the regular income tax rate. And then you calculate taxable income based on AMT rules and apply the AMT tax rate. You will pay whichever is more.

The Medicare Surtax is a new 3.8% tax that will apply to the lesser of your net investment income, or the amount of your modified gross adjusted income that is over $250k for a married couple, or $125k for a single person or married couples who file separate returns. For most people, modified adjusted gross income will be the same as your adjusted gross income.

Net investment income is your gross investment income less allowable deductions. Investment income includes interest, dividends, annuities, royalties, and rents that come from passive business activities.

It also includes gains from the disposition of property. So if you sell property after December 31st, any profit, or gain, that you make on that property is going to be hit with this new tax.

The tax does not apply to amounts distributed from qualified retirement plans. It also does not apply to any amount that is subject to the self-employment tax. This rule prevents the Medicare tax from applying twice to the same income.

Learn more about the tax changes and what you can do about them in the information-packed webinar “What Taxmageddon Will Mean To You” at

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