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How the New "Medicare Tax" Affects Real Estate Investments


The housing market is beginning to rebound and you may be looking to take advantage, but the so-called Medicare tax may actually affect current or future real estate investments.

This article published with permission from InvestmentU.com.

If you’ve read any of my articles recently, you probably know how I feel about the current opportunity in real estate.

We have seen that it does have legs through the latest numbers — and with the actions of some of the biggest players in the investment world. So I would be remiss not to follow up on any prevalent developments in the industry.

One of the ways to take advantage of the rebound is through the purchase of real estate itself. Right now, there’s a strong case for being a landlord. As I have mentioned in previous articles, homebuilders have seen a run-up in 2012, and according to some measures, home valuations are near a 14-year low. That still presents itself as an opportunity.

But here’s something that any current or future real estate investor must keep in mind:

The housing market may have bottomed out, but what’s very ambiguous right now is what part taxes will play in selling homes…

Where the new “Medicare tax” comes into play

In order to help fund the Affordable Healthcare Act (or Obamacare), the legislation instituted a 3.8% surtax that would apply to many kinds of investment income. And as it would happen, it affects all the different kinds of investment income we’ve been promoting in this market like interest, dividends, rents and capital gains.

As far as real estate is concerned, many experts believe that it won’t have a far-reaching impact in the industry as most feared.

However, it could be a serious blow to many investors. Specifically, the law could have a profound effect on those investors who made a hefty profit or those who made some large gains from the sale of a vacation home or investment property.

Nobody said it was easy

When have laws involving taxes or investments ever been easy for us laymen to understand? But here’s what we do know:

• The Medicare tax will hit individual filers who make more than $200,000 in adjusted gross income (AGI), and married couples with an AGI over $250,000.

• These AGI numbers are not indexed for inflation, so this could affect more investors in the future.

• The tax will apply to the smaller amount between either your net investment income or the amount that your AGI is over the above thresholds.

And about your primary residence…

If you file as an individual and sell your primary residence for less than a gain of $250,000, that’s considered “excluded income.” The same applies for married couples if the gain is less than $500,000. Anything that isn’t included as taxable income also isn’t included in the whole Medicare tax equation.

Long story short: The Medicare tax will affect those higher-income earners whose real estate investment profits aren’t protected by the aforementioned exclusions.

What about vacation homes?

Be careful of vacation homes. They aren’t primary residences so any gain would be added to your AGI. This could possibly push you over AGI limits. The Medicare tax would apply to any excess income over that limit.

If you rent your vacation home, the rental income becomes taxable if it’s rented for more than 14 days. If you exceed those 14 days, the rent paid — subtract any expenses — is considered taxable income.

For investment properties, rents collected minus expenses must be considered investment income. This may make you subject to the tax.

Here’s a “word to the wise.” It’s okay to buy into the real estate rebound. But if you’re diving in by getting your hands dirty as a property manager, do your due diligence. You may also want to talk to a trusted tax adviser.

Jason Jenkins is a part of the research team at InvestmentU.com. See more articles by Jason here.

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