Starting in 2013, high income taxpayers will also be paying an additional 3.8% Medicare tax on all “unearned” income, which includes capital gains from the sale of real estate.
Those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to the new Medicare tax. It does not apply to primary residences for the first $250,000 on profits from the sale or to the first $500,000 in the case of a married couple. The tax will apply to vacation homes, rental properties and the disposition of other property.
Investors who sell property will now have a new tax to pay in addition to capital gains.
How will this hurt the Real Estate Market?
Investors will raise rents to make more money while the properties are rented.
When the investment property is sold, that property will be sold cheap, so not to have any or minimal profit therefore paying as little if any Capital gains tax.
Investors will or may stop “flipping” properties. You may thing this is good, however, the small time investor is the person who buys these properties cheap, rehabs the properties and brings them UP to market value. ie more houses will sit in disrepair for longer periods of time. It is the small time investors, small business owner that the new health care bill hurts and will limit small business profits.
Vacation home values may fall. Why? Vacation home owners who sell, may sell for much less then current value to pay as little capital gains taxes and the reduce new medicare tax payments on unearned income as possible.
This could also be the same for personal homes normally valued over $500,000 ( see first paragraph ) from the original purchase price. Sellers may just drop the price to a $500,000 gain, just to avoid the capital gain exemptions on personal homes sold for more then $500,000 then originally purchases for.
The new heath care bill is bad for Real Estate and Bad for the American population, and bad for Renters.
The good news
Defer Taxes in a 1031 Exchange
Fortunately for investors, the benefits of IRC Section 1031 allow an effective way to defer these taxes that would be incurred upon selling investment property. By structuring the sale appropriately – acquiring property that is at least equal to the fair market value of what a taxpayer sells and investing all net cash from the relinquished property into the replacement property – a taxpayer will be able to defer taxes until ultimately selling the property. With the step up in basis rules in place, investors are able to continue deferring tax by completing 1031 exchanges, and eventually pass their real estate to their heirs with a step up in basis equal to the fair market value of the property at the time of death. This means that the tax will never be paid by those heirs.
As with any transaction, it is important to consult with your own tax adviser and tax rules can change. If you are interested in an exchange, contact NCS Exchange Professionals.
Source used: NCS Exchange Professionals www.ncs1031.com
Call us. We have worked with investors and I am also a real estate investor since 1993. We can help you, or find the right answers to your questions.
read More on the 3.8% new TAX on real estate transactions – CLICK HERE