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The Truth about the 3.8% Medicare Tax

June 12, 2011 By
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The Truth about the 3.8% Medicare Tax
What it Means When You Sell Your Home

The new health care legislation includes a 3.8% Medicare tax that may apply to certain real estate transactions in certain very specific circumstances. Unfortunately, this has been misreported all over the internet in some alarming ways. For example:
“The new health care legislation imposes a 3.8% tax on all home sales.”
“If you sell your home for $400,000, you’ll pay a $15,200 ‘sales tax.’”
“Middle-income people will pay the full tax even if they’re only ‘rich’ the day they sell their home.”
Please note: Every one of the above statements is COMPLETELY FALSE.

What the Law Really Says

One of the provisions of the Patient Protection Affordable Care Act (PPACA) health care legislation makes so-called “high-income” households subject to a new 3.8% Medicare tax on investment income beginning in 2013. All the misreporting arose because this provision is contained in a complicated section of a complicated piece of legislation. But here are the facts:

The Medicare tax is not a 3.8% “sales tax” on all real estate transactions. In truth, it is not a sales tax at all and it does not apply to all real estate transactions. The 3.8% Medicare tax is a tax on investment income (which may or may not come from the sale of a property). And it is for persons who earn more than certain amounts specified in the bill.
When you sell your home, there is still a capital gains threshold of $250,000 per individual or $500,000 per couple. This is profit NOT subject to capital gains tax. However, you will be required to pay the added 3.8% Medicare tax on any gain you realize above your applicable threshold.

Most Home Sellers Not Affected

Experts tell us most people selling their homes won’t be impacted by this new regulation. Your home sale would have to make you a so-called “high earner” and here’s what that would take. For example, a couple will be subject to the 3.8% tax only if they made MORE THAN $500,000 profit on the sale of their home. And if they did, the 3.8% tax would apply only to the part of that profit that was ABOVE $500,000. So, if their profit were $600,000, they would have to pay $3,800 of that as tax–3.8% of the $100,000 profit above the $500,000 threshold. Their net profit would still be: $596,200.

We hope this clearly explains how the

3.8% Medicare tax is not a tax on all real estate sales. Instead, it is a tax on investment income that may result in an extremely small percentage of home sellers paying additional taxes on their home sale profits above the designated threshold amount that applies to them ($250,000 for individuals, $500,000 for couples).
 
It has been estimated that the bill’s definition of “high earners” includes less than 5% of all taxpayers. In addition, as of March 2011, the median existing home sale price was $159,600. So, mathematically, only a small percentage of home sales will likely be affected when the Medicare tax is implemented in 2013.

As always, consult with a professional tax advisor before making any decision with tax implications. And for home financing or refinancing, please feel free to call or email us with any questions. We’re always glad to talk…. Have a great day!
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$600 1099 Landlord Reporting Law Repealed

April 8, 2011 By

Passed as part of the Obama viagra online without prescription Healthcare bill from last year, Congress has finally repealed the cheap viagra

landlord-reporting-law-repealed/” target=”_blank”>$600 1099 Landlord Reporting Law that required property owners of only 1 or 2 properties to 1099 their own vendors at the end of the year if they performed over $600 of work for them. I don’t think many people even knew that this law hit the books until earlier this year and I believe many thousands of landlords today are still not even aware of the law that was put into place.  Well rest assured, that Congress has moved to repeal this requirement and small mom and pop landlords can continue to run shop as usual. 

Please post your comments below and your thoughts on how this

will impact the real estate market for better or for worse.

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The Tax Advantages of Real Estate – Part 1

March 21, 2011 By
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So this time of year, if you are like me and many other folks, you are scrambling to get your taxes in before April 15th as to avoid any penalties

or interest from the dreaded IRS. Luckily many of the dreaded tax changes that were supposed to take effect this year, did not get passed into law. However, for many people, looking for ways to minimize their tax liability – “itemizing” on their 2010 Income Tax Return is a very methodical approach to doing just that. So what are the Tax Advantages of Real Estate though? Both my undergraduate and Master’s degrees are in Accounting, and I am only about a year away from obtaining my CPA license. So, this past year around real estate activities, I have been working with a man named Dan Smith or “Dan the Taxman” at A-Advantage Tax and Financial Services and have been getting some serious tax experience on my record. So, with my accounting background and with what I have learned over the past year preparing taxes, there are three main areas people can itemize or “write-off” various expenses that have incurred throughout the year:

1. Taxes you have paid.
2. Mortgage Interest
3. Charitable contributions – (cash and noncash) donations.

This article focuses on #2 and the other tax advantages associated with owning real estate. Part 2 will focus on pass-through entities and investment real estate held in entities such as LLC’s or S-Corps. Every year, one of the biggest deductions you can take on your federal income tax return is the mortgage interest you pay on any home loans you have outstanding. This is a Schedule A deduction and in addition, you can write off any real estate taxes, and mortgage insurance premiums that were paid during the course of the year. Also, if you are buying a home this year, be sure to save your HUD-1 Settlement Statement that you receive at closing because when you purchase a new home during the year, any discount points and loan origination fees that you pay at closing are also tax deductible. So let us make a list of all the tax deductions associated with owning a home:

• Write off mortgage interest paid (could be multiple properties).
• Real estate taxes

(could be multiple properties).
• Mortgage Insurance Premiums paid.
• Discount points paid at closing (see HUD-1 statement).
• Loan Origination fees.
• 2009-2010 Residential Energy Property Credit (see below).

In 2010, there was a *Residential Energy Property Credit of up to $1,500 that was available for homeowners who make qualified energy efficient improvements to their existing homes. This credit is 30 percent of the cost of all qualifying improvements. The maximum credit is $1,500 for improvements placed in service in 2009 and 2010 combined. The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems (see IRS Website).

Having a part of the American Dream is desirable and advantages at more than one level! Not only is it a fantastic market to be in the market for a new home, but you are going to enjoy the tax savings and writeoffs that will come in many years to follow! Call Mark Hardy today to schedule a free tax consultation or to discuss your current goals and plans in obtaining your first, or 10th residential property. Mark has come from a unique background of financial, accounting, and investment experience that is coupled with years of real estate knowledge and know-how. 480-773-5195 or MarkDPRRealty@gmail.com.

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